Amid anticipation of the Federal Reserve's interest rate decision, the dollar's strength is under scrutiny. The market, according to LSEG data, is pricing in a 34% chance of a rate hike on Wednesday, with some analysts from ING suggesting that if the Fed holds rates, the dollar's movements will largely depend on oil prices. A surge in oil prices, possibly due to disruptions in the Strait of Hormuz, could provide a strong impetus for the dollar.
Conversely, if oil prices remain subdued and the Fed opts against a rate hike, ING's baseline outlook suggests that the euro's downside against the dollar is limited to around $1.130, with a potential gradual recovery towards $1.150 in July. This upward trend for the euro is also tied to expectations of another rate hike from the European Central Bank in September. The euro showed some resilience, inching up 0.14% to $1.1401 after reaching a one-month low. The dollar index has also eased slightly by 0.15% to 101.27 after hitting 101.63 earlier.
Several factors are influencing market sentiment. There's speculation that the Fed might lean towards a hawkish stance even if they don't hike rates, which could support the dollar. ANZ Bank's Mahjabeen Zaman noted that a surprise hike would significantly boost the dollar, especially against lower-yielding currencies like the Japanese yen and Swiss franc. The Swiss franc separately faces potential losses if the Swiss National Bank maintains its zero interest rates, contrasting with higher global rates. ING also noted a specific scenario where the euro could drop to $1.1325 if it breaks below $1.1360.
