US Dollar: Fed uncertainty tempers USD strength – MUFG

FXStreetJul 27, 2026 11:52 AM

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MUFG’s Lee Hardman notes the US Dollar has softened as Middle East tensions ease and Brent Oil retreats below USD90, reducing energy-driven inflation fears. The correction in energy prices has slightly lowered market-implied odds of a near-term Fed rate hike. MUFG still expects the Fed to keep rates on hold this week, but does not fully rule out a hike.

Dollar reacts to rates repricing

"In the near-term, the correction lower in energy prices will dampen rate hike expectations for central banks ahead of the Fed’s, BoE’s and BoJ’s latest policy meeting this week."

"On Friday, the US rate market had moved to price in higher probability of the Fed starting to hike rates as soon as this week in response to heightened upside risks to inflation from higher energy prices."

"There were almost 10bps of hikes priced for this week’s policy meeting on Friday but it has dropped back to around 8bps this morning after the positive developments in the Middle East over the weekend."

"We have been assuming that the Fed would leave rates on hold this week but one can’t completely rule out the possibility of a rate hike."

"If the Fed delivers a hawkish surprise and hikes rates this week it would give the US dollar renewed upward momentum."

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

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