Commerzbank’s Antje Praefcke argues that the FOMC under Chair Kevin Warsh is likely to deliver a "hawkish hold", with markets already pricing at least one Fed rate hike by year-end. She highlights that recent declines in energy prices and a softer June inflation print reduce the odds of an immediate hike, limiting upside for the US Dollar and leaving EUR/USD sensitive to any scaling back of Fed tightening expectations.

Dollar vulnerable if hawkish hold disappoints

"In all likelihood, this overall situation should lead to a “hawkish hold” this evening. The market expects at least one interest rate hike from the Fed by the end of the year and sees a chance that more could follow next year as well. It does not want to completely rule out an interest rate hike even today, even though it sees only a low probability for this to happen."

"After all, it is unlikely that Warsh will adopt an extremely hawkish stance given the recent drop in energy prices and a surprisingly low June inflation rate."

"For EUR/USD today, the key question is whether these expectations will be fueled - or not."

"If the market scales back its expectations because the (possibly shorter than usual) FOMC statement or Warsh’s press conference suggests that the Fed views price risks as manageable and, above all, temporary, a correction in the USD is certainly possible."

"Consequently, upward pressure on the US dollar driven by rising expectations of interest rate hikes is also unlikely."

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