FX daily: Kevin Warsh holds the keys to Dollar resilience

Brent is holding below $80/bbl after details of the US-Iran deal emerged, adding a dovish argument ahead of the FOMC announcement today. We think new Chair Warsh will match the market's hawkish expectations, but risks are on the downside for the dollar, whose resilience now seems to rely solely on Fed hike bets. The Riksbank hold may still sound a bit dovish.

USD: Downside risks, but we expect Warsh to deliver

Today’s FOMC announcement is a key test of the dollar’s recent resilience. With Brent trading below $80/bbl after details of the US-Iran peace deal emerged yesterday, the greenback is increasingly reliant on expectations of Fed tightening this year. It therefore needs confirmation that policymakers – and especially new Chair Kevin Warsh – are seriously open to hikes, even as rates are almost certain to stay on hold today.

If Warsh or the broader FOMC signal a stance that is clearly at odds with market pricing, the dollar would sell off sharply in our view. But in our Fed preview, we argued that removing the easing bias from the statement and a cut from the median 2026 dot plot could be enough to keep the dollar firm. That is our baseline call for today: the Fed validating market expectations, and a broadly neutral impact on the dollar.

At the same time, we admit the balance of risks does appear tilted to the downside for USD after the US-Iran deal announcement. Softer energy prices strengthen the case for a dovish repricing, while the swap curve has so far remained insensitive to improved Middle East sentiment and still prices 21bp of tightening by December.

Ultimately, the main dovish trigger may come from Warsh’s communication rather than the statement itself. He probably has little incentive to intentionally surprise on the dovish side and risk upsetting the bond market at his first meeting, but markets may overinterpret any nuance in his remarks as signalling a future dovish tilt.

EUR: Aiming for stabilisation

EUR/USD resurfaced above 1.160 yesterday but is clearly awaiting cues from the Fed to leap in either direction. As discussed above, our call is neutral on the dollar today and, by extension, on EUR/USD.

However, the inclusion of financial incentives for Iran in the peace deal (oil export resumption, economic development funds and asset unfreezing) does make the drop in oil prices look more sustainable, and therefore reduces downside risks for EUR/USD from here. We expect consolidation in the 1.160-1.1650 area for now.

One EUR-cross we are monitoring closely this week is EUR/GBP. That is trading slightly firmer this morning after May’s UK inflation surprised slightly on the downside. Headline CPI was unchanged at 2.8% (consensus 3.0%) mainly due to muted food inflation and the core reading inched slightly higher to 2.6% (consensus 2.7%). Services CPI was, however, slightly hotter than expected at 3.7%. These figures don’t change our call for a 7-2 hold vote by the Bank of England tomorrow.

Risks however remain on the upside for EUR/GBP as 30bp of BoE tightening in the curve appears too hawkish, and some political risk premium may re-emerge after tomorrow’s by-election that is expected to pave the way for Andy Burnham to replace Keir Starmer as Prime Minister.

SEK: Riksbank's hawkish room remains limited

The Riksbank announces monetary policy this morning at 0930 CET, and we expect a hold at 1.75%, in line with consensus and pricing. As discussed in our preview, policymakers might try to strike a more hawkish tone while maintaining a wait-and-see stance to keep 2H26 hike pricing broadly intact and anchor inflation expectations.

But markets may struggle to embrace a less accommodative narrative as new projections will, in our view, fail to show CPIF inflation peaking above target or signal a rate hike already in 2026. We therefore see a neutral to mildly negative impact on SEK today.

Still, the main driver of EUR/SEK has been crude, and we wouldn’t expect the pair to trade back above 11.00 purely on the nominal rate differential story. We are mostly neutral on EUR/SEK this summer, with growth and rates differentials applying offsetting forces. We retain a preference for the downside into year-end, targeting 10.70.

CEE: Market overshoots outpricing rate hikes

Rates tried to continue Monday's rally yesterday, however we saw some pushback from the market and a reversal from intraday lows. As we discussed here yesterday, especially in Poland, it seems the market has gone too far with the current pricing of only a 50% chance of a central bank rate hike in the one-year horizon. Although our economists expect rates unchanged as a baseline, we expect the market to want to keep some probability of rate hikes until we see more confirmation in the data.

PLN saw some rally after more positive global headlines and a drop in oil prices. On the other hand, the rate differential is increasingly pointing to a higher EUR/PLN somewhere around 4.260, the upper end of the current range.

In Hungary today, the wage figures will be released, one of the last numbers before the National Bank of Hungary meeting next week. The baseline remains a 25bp rate cut for us with little chance of seeing a bigger move. EUR/HUF is testing new lows below 350 which could be a trigger for the central bank to frontload easing.

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