- The de-escalation in the Middle East has left the dollar vulnerable.
- The Bank of England is managing rate expectations, maintaining the outlook for two hikes.
Over the past two weeks, the US dollar has fallen to its lowest level since early March, giving back almost all the gains made since the start of the armed conflict in the Middle East. Talks with Iran are set to resume in the coming days. Donald Trump continues to insist that the war will end soon and that an extension of the ceasefire will not be necessary. Coupled with record highs in US stock indices, this is contributing to the continued rally in EURUSD, as geopolitics has ceased to support the greenback, bringing macroeconomics back into focus.
Investors’ attention has also shifted to corporate earnings reports and Congress’s deliberations on Kevin Warsh’s nomination for the post of Fed Chair. Contrary to Trump’s promises, the replacement of the Fed Chair may coincide with accelerating inflation driven by rising oil prices, requiring a tightening of monetary policy. What will Warsh choose? To justify the president’s trust or to demonstrate the central bank’s independence and adherence to its principles?
Investors are drawing parallels with the 1970s, when an inflationary shock amid the oil crisis saw the Fed chair, loyal to the White House, ease monetary policy. The rate cuts resulted in an even sharper rise in consumer prices and the entrenchment of high inflation expectations. At that time, the US dollar collapsed. It was only the subsequent change in the central bank chief and the aggressive tightening of monetary policy, despite the recession, that put the dollar on a path of steady growth from the summer of 1980.
Currency interventions could put pressure on the greenback. Japan’s Finance Minister Satsuko Katayama has long spoken of selling USDJPY. However, following a conversation with Scott Bessent, the intensity of her pressure on speculators has increased. This suggests that the US is not opposed to intervening in the Forex market. In 1985, coordinated currency interventions led to a multi-year decline in the USD.
Other European currencies are rising in tandem with the euro. The British pound has returned to pre-war levels, partly due to the ‘hawkish’ rhetoric of Bank of England officials. Megan Green believes that the futures market’s expectations of two rate hikes in 2026 are justified. Meanwhile, Andrew Bailey stated that previous market estimates of four hikes were too high.
The FxPro Analyst Team