Outlook
The US dollar remains on the back foot as political risk and policy expectations weigh on it. Trump’s Iran threat and the risk of a US government shutdown have traders pricing in additional USD risk premia, while a softer domestic data pulse (jobs claims) reinforces a shifting outlook for US rates. A potential escalation in Iran or a Trump-led disclosure on the next Federal Reserve Chair could add near-term volatility to USD pairs. Overall, the dollar is seen trading with a bias toward softer levels against the Euro and sterling, but with flashes of volatility tied to geopolitical headlines and Fed communications.
Key drivers
- Political and policy risk: Trump’s Iran stance and the threat of a government shutdown raise risk premiums in USD; larger-than-expected US jobless claims add to domestic policy uncertainty.
- Fund flows and risk sentiment: A “Sell America” trend has investors retreating from USD assets, equities, and Treasuries amid geopolitical and trade-policy uncertainties.
- Monetary policy path: Markets broadly expect two Fed rate cuts in 2026 (March and June), taking the policy rate toward around 3.25% later this year, a view highlighted by market strategists.
- Geopolitical tensions: Recent US actions in Venezuela and Canada-related trade tensions contribute to market volatility and USD bid-asks in the short run.
- USD momentum and commodity link: The USD index has shed roughly 10.4% since January 2025, reflecting a softer dollar environment amid fiscal deficits and more permissive monetary policy; oil resilience adds a dimension to risk sentiment and inflation expectations.
- Price action in major pairs: EURUSD at 0.8436 (about 1.5% below its 3-month average of 0.8567), GBPUSD at 0.7303 (about 2.5% below its 3-month average of 0.7487), USDJPY at 154.7 (about 0.8% below its 3-month average of 156). Oil markets show WTI around 69.09, a 90-day high, about 9.4% above its 3-month average of 63.16, with a 59.04–69.09 range.
Range
USD/EUR around 0.8436, within a 3-month range of 0.8312 to 0.8711; currently about 1.5% below the 3-month average of 0.8567.
USD/GBP around 0.7303, within a 3-month range of 0.7227 to 0.7681; currently about 2.5% below the 3-month average of 0.7487.
USD/JPY around 154.7, within a 3-month range of 152.3 to 159.1; currently about 0.8% below the 3-month average of 156.
Oil (WTI) around 69.09, 90-day high, within a 59.04–69.09 range; about 9.4% above the 3-month average of 63.16.
What could change it
- Escalation or de-escalation in Iran and related Middle East tensions could trigger sudden USD moves.
- A Fed Chair nomination announcement or shifts in the expected path of policy rates (more aggressive or more dovish) could reprice USD expectations.
- Resolution of US funding issues or a government shutdown deal could ease near-term USD volatility.
- Economic data surprises (inflation, payrolls, growth) that alter prospects for rate cuts or hikes would shift the dollar’s trajectory.
- Oil price shocks—up or down—can influence USD dynamics through commodity-inflation links and risk sentiment.
