FUNDAMENTAL OVERVIEW USD: The US dollar weakened across the board on Thursday after Trump cancelled the planned attacks on Iran and announced a deal to be signed in the following days.
As a result, Fed rate hike expectations got pared back immediately with the market now pricing in 16 bps of tightening by year-end compared to 24 bps before the deal announcement
In the short-term, the focus will be on this new development as oil prices fall and inflation concerns ease. On Wednesday, we have the FOMC rate decision where the Fed is expected to keep interest rates unchanged and drop the easing bias. The Fed will also release the latest economic projections and the dot plot.
The market might forgive some hawkish tone from the Fed decision in light of this new development but not if the central bank places more weight on economic strength rather than easing inflation expectations. Looking ahead, oil prices will likely continue to fall and might reach pre-war levels. The risk then is that the negative supply shock turns into a positive demand shock that boosts economic activity further requiring rate hikes anyway.