FX Daily: Fed hold could pressure the dollar today

in Daily Currencies Ratings 29/07/2026

USD: Dollar may reconnect with lower oil after a Fed hold

Our Fed preview, published last week, argued that precautionary positioning for a possible surprise Fed hike could keep the dollar supported ahead of today’s FOMC announcement. That appears to have been the case. Even with softer consumer confidence data and de-escalation headlines weighing on the dollar yesterday, DXY has shown little sensitivity to the recent decline in oil prices.

That resilience is likely to be tested today. Markets are pricing in 7bp, or roughly a 25% to 30% probability, of a Fed hike today. In theory, if rates are kept unchanged, as we expect, that should trigger a mechanical decline in front-end USD rates. Still, the vote split will be closely watched, because it will help shape how firmly investors keep year-end rate expectations anchored.

Consensus appears to expect two dissenters — Logan and Hammack — to vote for a hike. If that is the case, year-end rate expectations of 41bp may remain broadly supported. Even so, we would still see downside risks for the dollar. The reason is the same as above: a Fed hold should prompt an unwinding of precautionary USD positioning, allowing the dollar to reconnect with the signal from lower oil prices. The overnight resumption of military strikes in the Gulf does not appear to have significantly dented markets’ hopes for de-escalation, with Brent still below US$90 a barrel.

In other words, unless Fed Chair Kevin Warsh surprises with a hawkish message, or more than two dissenters emerge, we think the dollar will come under pressure today. If constructive headlines from the Gulf return, we expect DXY to test 101.0 by the end of this week.

Francesco Pesole

EUR: Looking back toward 1.15 soon?

The renewed military strikes overnight are a reminder that caution remains warranted on EUR/USD. Even so, if markets are right to maintain a broadly constructive view on further de-escalation, there is a good chance the pair bottomed out last week.

For a sustained move back above 1.15, two ingredients are still missing: dovish Fed repricing, either through U.S. data or communication, and a stabilisation in risk sentiment. While tech stocks’ relative independence from rates helped support EUR/USD during the spring, the current turmoil in the chip sector may now cap gains even if Middle East headlines improve.

With little on today’s eurozone calendar, EUR/USD should take its cue from the FOMC. As a baseline reaction to a modest dovish Fed surprise, we look for a move back into the 1.1400-1.1450 range over the coming days.

Francesco Pesole

AUD: CPI comes in surprisingly soft

Australian inflation was softer than expected this morning. Headline CPI slowed from 4.0% to 3.8% in June, equivalent to 0.6% quarter-on-quarter, while the trimmed mean — Australia’s preferred core measure — held at 3.6% versus expectations of 3.7%.

The market reaction has been significant. The two-year AUD swap rate fell 10bp, leaving AUD as the only G10 currency weaker against the USD today. Markets have sharply pared back Reserve Bank of Australia tightening expectations, from around 20bp before the release to 13bp at the time of writing.

We also expect no further RBA hikes this year, but the market response may be somewhat excessive. Higher energy prices in July suggest inflation data over the rest of the summer could prove less reassuring, and Governor Michele Bullock has continued to signal that additional tightening may still be required to return inflation to target.

In the near term, AUD remains challenged by volatility in Asian equities. However, our dovish Fed view, the more limited scope for further declines in front-end AUD rates, and AUD’s favourable carry and terms of trade keep the medium-term outlook constructive. We continue to target 0.73 in AUD/USD by December.

Francesco Pesole

CEE: Fed risk is in focus, but the local story is turning constructive

Markets stabilised somewhat yesterday across both rates and FX. Investors are clearly waiting for today’s Fed decision, which could have a meaningful impact on emerging market currencies. The risks look asymmetric if the Fed hikes, versus our baseline, as that would likely hit CEE currencies harder. By contrast, an on-hold decision should provide only a modest boost.

That said, current market conditions still feature lower oil and gas prices and a disconnect between rates and FX. A no-hike Fed outcome could therefore unlock the remaining upside in CEE currencies, which have been held back in recent days by caution ahead of the decision. That makes today’s Fed meeting slightly less asymmetric for CEE.

Locally, today should be quiet, with the key data releases due later this week: GDP in Hungary and the Czech Republic on Thursday, and CPI in Poland on Friday. We may still hear from the CNB before its blackout period begins on Thursday.

CEE is also entering the key phase of preparing next year’s budget plans. In the Czech Republic, the prime minister said yesterday that the deficit should not exceed 2.9% of GDP, compared with 2.4% this year. That should reassure markets that the new government will remain below the 3% threshold, although the deficit is still set to widen.

In Poland, media reports point to possible tax increases, alongside a potential rise in the tax allowance, as the government looks for the right mix ahead of next year’s general election. We expect the deficit at 6.8% of GDP this year and 6.3% next year. In both countries, final draft budgets should be presented around late August or early September.

Frantisek Taborsky

Source: ING