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- DXY bulls remain on the sidelines ahead of the crucial FOMC decision later this Wednesday.
- Persistent geopolitical uncertainties continue to act as a tailwind for the safe-haven buck.
- Rebounding oil prices revive inflation fears and Fed rate hike bets, favoring bullish traders.
The United States Dollar Index (DXY), which tracks the Greenback against a basket of currencies, is seen consolidating below the 101.50 level during the Asian session as traders await the outcome of a two-day FOMC meeting, due later this Wednesday. The Index, however, retains a bullish undertone near an over one-month high, touched on Tuesday, and seems poised to appreciate further amid persistent geopolitical uncertainties.
Iran’s Islamic Revolutionary Guard Corps (IRGC) launched a surprise attack and targeted US forces in the Middle East with multiple ballistic missiles late Tuesday. Furthermore, President Donald Trump once again warned that the US will return to strong military action against Iran if diplomatic efforts do not bring a rapid resolution to the crisis. This fuels concerns about a fresh escalation of tensions in the region and prompts traders to price in the geopolitical risk premium, which should act as a tailwind for the safe-haven US Dollar (USD).
Meanwhile, the latest developments trigger a sharp rally in crude oil prices, reviving inflation fears and raising prospects for an interest rate hike by the US Federal Reserve (Fed). This might further hold back traders from placing aggressive bearish bets on the DXY and warrants some caution before positioning for deeper losses. The upside, however, seems capped as investors opt to wait for the crucial FOMC policy decision, due later today. Investors will look for more cues about the Fed’s future policy path, which should provide a fresh impetus to the USD.
Economists at DBS highlight that investors remain “highly cautious about the upcoming FOMC meeting (decision due 30 July 2am, SGT),” noting that the recent “pause in US-Iran hostilities did prompt a correction lower in crude oil prices” but has not materially eased policy concerns. According to DBS, the market is still “assigning 34% odds that the Fed would hike this week and close to 100% odds for the meeting in September,” underscoring persistent expectations that the Fed will resume tightening even as near-term geopolitical risk premia in oil have partially unwound.
