Brent crude has extended its decline and is testing technical support at its 200-day moving average of $78.46 per barrel, while the US dollar has steadied just above the week’s low after giving back more than half of its gains since the May non-farm payrolls release. Market attention is turning to the Federal Reserve, where a hawkish hold is seen as supportive for a firmer dollar, even as communication risks are in focus.
The policy debate at the Federal Open Market Committee is described as moving from an easing bias towards neutrality, with labour demand improving and inflation edging higher. That shift puts emphasis on whether the tone validates Fed funds futures that price a 25 bps hike by year-end, or pushes back against that path. The dot plot is expected to move from signalling a 25 bps cut in 2026 towards a median projection consistent with a 25 bps hike, though Chair Kevin Warsh is expected to play down the SEP and dot plots and to lean on trimmed-mean inflation measures, such as the Dallas Fed trimmed mean PCE and the Cleveland Fed 16% trimmed mean CPI, which are below core PCE.
Fed Communication Risks and Dollar Volatility
We see the US Dollar consolidating as the market awaits the Federal Reserve’s decision this week. While the recent May jobs report, showing the addition of 272,000 jobs, points toward a hawkish hold, the primary risk is not the data but the communication from the Chair. The dollar’s future direction hinges entirely on how this message is delivered.
The key conflict we are watching is between the official statement and Chair Warsh’s press conference. We anticipate the dot plot will shift to signal one 25 basis point hike in 2026, yet Warsh is likely to downplay its significance. His focus on alternate inflation data, like the Dallas Fed’s Trimmed Mean PCE which recently printed at 2.6%, gives him room to sound more dovish than the underlying numbers suggest.
This potential for a mixed signal makes holding a simple directional bet on the dollar extremely risky. We believe implied volatility in currency options, particularly for the EUR/USD and USD/JPY pairs, is currently too low given the circumstances. We see an opportunity in buying straddles or strangles to profit from the sharp price movement that is likely to follow the Fed announcement, regardless of the direction.
Brent Crude, Disinflation, and Carry Trade Hedging
We are also monitoring Brent crude, which is struggling to hold support at its 200-day moving average of $78.46 per barrel. A decisive break below this level would signal growing disinflationary pressures globally, giving Chair Warsh more justification to soften his tone. This would likely cap any potential dollar rally and could trigger a more sustained move lower.
For this reason, we are cautious about our existing long-dollar carry trades, which are vulnerable to a sudden shift in interest rate expectations. We are using short-dated options to hedge against a potential reversal in the coming weeks. Historical precedent shows that when a Fed Chair’s communication diverges from the committee’s economic projections, the market reaction is often swift and volatile.
