The US Dollar Index (DXY) climbed towards 100.40 after the Federal Reserve kept rates unchanged at 3.50%-3.75% in Kevin Warsh’s first meeting as chair. The statement dropped its reference to “additional rate adjustments”, pushing markets towards a more data-dependent read. Forecasts showed 2026 GDP growth at 2.2% versus 2.4% in March, while longer-run growth stayed at 2.0%; the dot plot also shifted, with the median end-2026 federal funds rate seen at 3.8%, up from 3.4%, implying room for a hike this year. EUR/USD hovered around 1.1500, GBP/USD fell near 1.3270 with the Bank of England expected to hold at 3.75%, and USD/JPY rose towards 160.80 as Warsh reiterated the 2% inflation target.
AUD/USD traded near 0.7000 as sentiment improved after Donald Trump said the Strait of Hormuz had reopened, while warning strikes could resume if Iran “acts up”. WTI was steady near $75.40 per barrel after data showed Iranian tankers transiting the strait, though risk premiums persisted. Gold slid to about $4,240 as the stronger dollar and higher yields weighed. The diary includes SNB reports and rates, UK jobs and GfK confidence, the BoE decision, US jobless claims and the Philadelphia Fed survey, Japan CPI and BoJ minutes, plus Germany PPI on Friday.
Dollar Strength and G10 Strategies
The Federal Reserve’s hawkish stance yesterday signals a period of sustained US Dollar strength. We see the Dollar Index (DXY) targeting fresh highs after breaking the 100.00 barrier, reminiscent of the sharp rally seen during the 2022 tightening cycle when the index surged over 15%. This means our primary focus in the coming weeks will be on strategies that benefit from a stronger greenback.
Given the policy divergence, we are looking for opportunities to short EUR/USD and GBP/USD. The European Central Bank has already shown its hand with a recent rate cut in early June 2024, and with Eurozone inflation moderating to 2.6% in May, their path differs sharply from the Fed’s. The Bank of England’s decision later today will be crucial; a dovish hold, which we expect, would accelerate the pound’s decline against the dollar.
The move in USD/JPY to 160.80 is significant, but we must be cautious about chasing it further without protection. While the yield differential is highly favorable, Japanese officials have historically intervened to support the yen, as seen in late 2022 and again with verbal warnings throughout 2024 as the pair crossed the 155 level. We will look to buy dips but also consider buying out-of-the-money puts to hedge against a sudden intervention.
Gold, Oil, and Volatility Outlook
For commodities, the outlook for gold has weakened considerably. Higher US interest rate expectations increase the opportunity cost of holding non-yielding assets, putting downward pressure on the price. We anticipate gold will retest lower support levels, as it did in late 2023 when real yields last peaked.
Oil remains a more complicated trade, caught between a strong dollar and geopolitical risk from the Strait of Hormuz. We see WTI oil prices likely remaining range-bound between $72 and $78 per barrel for now. We will be closely watching the weekly EIA inventory data, which recently showed a build of 3.7 million barrels, to gauge short-term demand signals.
Volatility is likely to increase as the market digests this new Fed outlook. Today’s US Initial Jobless Claims and Philly Fed Manufacturing Survey will be the first tests of the Fed’s data-dependent approach. We believe buying volatility through options on major indices or currency pairs could be a prudent strategy over the next few weeks.
