Fed set to deliver judgment on Middle East inflation risks
Tuesday’s session saw the dollar give back further ground. After Monday’s dip, the greenback traded mostly sideways in Asia before weakening through the European and US sessions, with the evolution of conflict in the Middle East and oil prices still the dominant themes for FX markets. That said, tra
USD
Tuesday’s session saw the dollar give back further ground. After Monday’s dip, the greenback traded mostly sideways in Asia before weakening through the European and US sessions, with the evolution of conflict in the Middle East and oil prices still the dominant themes for FX markets. That said, traders should also be keeping one eye on the FOMC tonight. We expect the Fed to leave the federal funds range at 3.50–3.75%, while our base case is for any guidance to acknowledge energy‑driven inflation risks without pushing back too hard on market rate‑cut expectations. That said, risks skew toward Chair Powell striking a more hawkish tone than we anticipate, leaving us with a constructive bias on the dollar. If the Fed meets our expectations and the Middle‑East conflict keeps oil elevated, downside should be contained, while signs of excess concern over oil prices are likely to leave the dollar stronger.
EUR
The euro eked out modest gains on Tuesday but remained trapped in its recent range, largely unaffected by a soft set of ZEW survey figures, which pointed to a sharp drop in investor expectations. Today brings final euro‑zone CPI for February, with headline inflation expected to be confirmed at 1.9% and core at 2.4%. That said, it will be the FOMC’s tone tonight, and tomorrow’s ECB meeting, that are likely to be more consequential for near‑term EURUSD prospects. Both central banks are likely to leave rates unchanged, meaning that any guidance will be key. On this point, we suspect President Lagarde will likely acknowledge that higher oil prices lift inflation risks but balance this against a growth hit and thus avoid endorsing market pricing for rate hikes. We therefore expect the ECB to stress flexibility and readiness to act rather than telegraph immediate tightening. Until then, EURUSD should remain sensitive to risk sentiment and geopolitics, and any signs of Fed hawkishness overnight.
GBP
Sterling tracked the euro on Tuesday, moving modestly higher against the dollar, with Middle East risks and oil prices still dictating broader market price action. Domestically, attention now turns to tomorrow’s Bank of England meeting. Our week‑ahead note called for the MPC to keep Bank Rate at 3.75%, a change from our prior expectation for a cut, with policymakers acknowledging that the recent energy shock could boost inflation, despite otherwise soft domestic economic conditions. Still, our base case sees the Committee delivering a 7‑2 vote for no change, retaining an easing bias and pushing back against market pricing that assigns a non‑trivial chance of hikes. If correct, such guidance should weigh on sterling, helping to reverse the pound’s recent outperformance against the euro.
CAD
The Canadian dollar tracked sideways on Tuesday as markets waited for today’s twin central‑bank decisions out of North America. Our expectation is for no change in rates from either the Bank of Canada or the Fed. The BoC will announce its policy decision first, at 13:45 GMT. We expect the Governing Council to hold the overnight rate at 2.25% and deliver a balanced message: acknowledging upside inflation risks from the Middle‑East conflict but emphasising that domestic conditions warrant caution. Markets currently price some probability of hikes later in the year; a neutral or dovish tone would therefore be mildly supportive for the USDCAD. Later in the day, the FOMC decision could add volatility, with risks of further upside pressure for the pair. Putting that together, we expect USDCAD to end the day above the 1.37 mark, albeit the likelihood of a breakout from recent ranges looks limited in our eyes.