Bar for further USD gains 'high' after Fed's hawkish turn

Trump’s diminishing impact on US rates

The dollar reacted positively to the Fed’s hawkish turn, with the emphasis on price stability, the more aggressive upward shift in the dots and the multiple references to the Fed missing its inflation target for five years running all supporting the narrative that higher rates may not be too far away.

Indeed, following the meeting, futures see 37 basis points of hikes between now and year end, i.e. a 50/50 shot of as many of two rate increases in 2026.

We think that the bar for further dollar gains from here is quite high. The imminent signing of the Iran framework peace deal means that oil prices could continue to ease, which should alleviate pressure on US inflation and may preclude hikes in the second half of the year.

The new dot plot does, however, suggest that it won’t take much to tip the balance in favour of a hike, much to the dismay of President Trump, whose influence on the path of US rates appears diminishingly small.

Less forward guidance to inject greater volatility

Kevin Warsh’s tenure as the new Chair of the FOMC has begun with a bang. The prevailing assumption was that a Fed led by a Trump appointee would adopt a more dovish policy stance, at least partly bent to the President’s wishes for lower US rates. Wednesday’s meeting suggests otherwise.

Another key consideration is Warsh’s well-known aversion to forward guidance. This reluctance to provide clear guidance could inject greater uncertainty into markets and fuel higher market volatility surrounding Fed policy announcements.

The impact on the dollar here would be more ambiguous, potentially making US dollar movements harder to predict.