USD mixed ahead of FOMC - Scotiabank

The US Dollar (USD) has edged back a little from its overnight peaks and stocks are flat to slightly firmer while crude prices have eased a little as investors dial back geopolitical worries, at least for the moment, and focus on the Fed, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Middle East situation remains tense

"The FOMC decision at 14:00ET is expected to result in no change in policy but possibly reflect a somewhat more hawkish-looking, near-term outlook. The challenge of navigating a narrow path between persistent inflation and growth risks resulting from tariff policy could see the dots edge away from the consensus and swaps which anticipate two cuts over the balance of the year. Policymakers may also be cognizant of the risk of a further deterioration in the situation in the Middle East which would have implications for energy prices."

"Mildly hawkish inferences from the dot plot may be tempered by Fed Chair Powell's press conference. His disdain for the signaling value of the dots is well known. No change in policy and even a mildly hawkish tilt to messaging may heighten the White House's frustration with the Fed, however. Speculation that President Trump could announce Chair Powell's replacement soon, to act as a 'shadow chair', seems to be a risk that markets are embracing. Bloomberg notes a surge to record volume on a Mar 2026/Jun 2026 SOFR futures spread trade that effectively reflects a bet that US rates will fall sharply after Powell's term ends next May--something that will constrain appetite for the USD beyond near-term haven demand."

"President Trump's call for Iran's 'unconditional surrender' and the stacking of US military assets in the region has boosted expectations of direct US involvement. Consequences are unknowable but could result in further, upward pressure on energy and the USD in the short run. The broader dollar downtrend has not been challenged by gains in the DXY in the past few days. A move in the DXY above 99.00/10 may point to more, near-term gains, however. On the data front, US weekly claims data are out a day early ahead of tomorrow's federal holiday. New Zealand releases Q1 GDP data while Australian releases the May unemployment report this evening."