United States Dollar: Upside scope seen but limits in view – MUFG

MUFG’s Derek Halpenny notes the US Dollar has extended gains after a record hawkish shift in the Fed’s dot plot, even as Oil remains sharply lower over the past month. He highlights IEA projections of an oversupplied crude market into 2027 and argues US inflation is likely peaking, with Fed rate hikes still seen as unlikely. MUFG expects EUR/USD to gain later in 2026.

Fed dots, Oil and EUR/USD prospects

"The US dollar (DXY) has advanced further to a level not seen since May 2025 with the substantial hawkish shift from the Fed this week continuing to reinforce positive momentum. In the three days since the Fed meeting, the dollar is 1.5% stronger. The momentum is being helped by the postponement of the signing of the MoU in Switzerland after Iran pulled out, accusing Israel of breaching the deal by attacking Lebanon."

"Over the short-term, the US dollar can certainly extend further. The shift in the dots was the most significant since the dots were first published in 2012. This largest ever hawkish shift in the dots came at a time when the risks to inflation have receded markedly given the plunge in crude oil prices."

"The IEA Monthly Report released this week also highlights the prospects of an over-supplied market potentially driving prices further lower. The drop over the last month can also be explained by the fact that traffic through the Strait of Hormuz was already picking up notably in May/June. The IEA estimated that shipments through the SoH, supported in part by ship-to-ship transfers in the Gulf of Oman, increased from 9.6 mb/d in May to around 12 mb/d in early June."

"If the deal between the US and Iran is done and holds, the disinflation impetus from energy could be very considerable by year-end and into 2027. Inflation in the US is likely at around the peak so the scenario of the Fed having to hike rates still looks very unlikely to us."

"We understand the positive momentum for the dollar following the record hawkish shift in the dots but it still doesn’t really tally that it leads to a rate hike. On the other hand, the ECB could well see the benefit of hiking again. The difference between the ECB and the Fed is the policy setting level and the mandate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)