FX daily: The Dollar caught between Oil smoke and a stale Fed Minutes

Stale Fed Minutes

The FX and broader market are not exactly clutching their pearls over the renewed US-Iran escalation. Oil is higher, which does provide a small mechanical bid for the dollar, but the greenback is not yet trading as a full-blown geopolitical dollar squeeze higher. It feels more like a market acknowledging the smoke without pricing in the building on fire. The greenback is caught in that awkward middle ground between fading US exceptionalism as the AI trade wobbles and rediscovering its old safe-haven muscle when the Strait of Hormuz starts flashing red again.

That makes tonight’s FOMC minutes feel oddly over-advertised. Some in the market are treating them like fresh bread from the oven, but in reality they are closer to a two-week-old loaf left on the counter. Yes, oil is elevated today, but between the June FOMC meeting and spot, crude is still down more than 15% over that two-week window. Just as importantly, retail gasoline has moved lower as well and is back near levels last seen in mid-March. Add in the weaker NFP report, including the negative two-month revision, and the labour market no longer looks quite as forgiving for a hawkish Fed narrative..

The bigger signal wasWarsh’s comments at Sintra, where he acknowledged that inflation risks were starting to subside. That was not exactly a lightning bolt from the blue given the energy backdrop, but it still matters. It suggests the Fed’s inflation anxiety may already be cooling, which means any hawkish inflation language in tonight’s minutes needs to be handled with oven mitts. It may tell us where the Committee’s head was in mid-June, not where its feet are planted now.

That is where the rates market looks stretched. The OIS curve still prices close to a 30% chance of a July hike and around 40 bps of hikes by March 2027. That feels like a lot of hawk to carry on a perch that is starting to wobble. With labour data softening and energy no longer pushing in the same direction, the balance of risk looks less like another hike and more like the Fed eventually needing to ease. Of course, if the conflict keeps re-escalating, if Hormuz becomes commercially dysfunctional, or if oil snaps back hard, the inflation story can be dragged back into the room. But absent a sharper energy rebound, US rates look mis-priced.

Next week’s CPI is therefore the cleaner market test. Energy should be a drag, not a tailwind, this time; tariff-related base effects should start falling out of the annual comparisons, and slowing rents in private data should begin feeding more clearly into official inflation over the second half. If that CPI print confirms the start of disinflation, the market’s current Fed pricing could look less like prudence and more like muscle memory from the last inflation scare.

For FX, the dollar’s renewed support has increasingly come from rate spreads, and those spreads have been fed by the perception that Warsh is a hawk. But beyond a firm commitment to the 2% inflation goal, the evidence for that hawkish label is thinner than the market wants to admit. Leveraged funds have swung long dollars quickly, but the data flow has not been strong enough to make that positioning feel bulletproof. If CPI softens and Warsh fails to deliver the hawkish performance markets have already paid for, the dollar bid could turn from sturdy to crowded very quickly.