Bitcoin flat at $64k as markets parse U.S. regulations, Iran tensions
We see a high risk that the Fed will revise its median Dot Plot to signal the next cut only in 2027. That could influence markets in a meeting where caution could be the name of the game, given the highly volatile situation. We see upside risks for the dollar. The CEE region sees some relief, but markets still expect rate hikes, which will soon test central banks
USD: Cautious Hawkish Re-Assessment by the Fed
The dollar’s slip yesterday appeared more a symptom of position squaring ahead of today’s FOMC risk event rather than a signal of further optimism on geopolitics. It has been a rare case of dislocation between oil prices and the dollar since the Iran conflict started, perhaps hinting that markets are – at least for this week – shifting their focus to the central bank reactions, also considering few signs of an imminent de-escalation.
We preview today’s FOMC meeting here. The Fed will keep rates on hold, but the risks are clearly of a hawkish revision in the Dot Plot projections, with the median currently signalling one rate cut by year-end. That matches current market pricing (-27bp for December), and the dollar should benefit from a revision to no cuts in 2026. In terms of dovish risks, reintroducing “downside risks” mentioned in the statement’s section about jobs could help markets maintain expectations for a cut on a dual-mandate rationale.
What appears less likely is strong statements by Chair Powell on the inflation-growth implications associated with the conflict. The geopolitical and commodity market conditions are still too volatile to venture into guidance in that sense.
Markets will need to read into new projections to infer some policy response framework, but we think rate expectations will remain fluid and tied to oil market swings even after this Fed meeting. Accordingly, we expect a positive, but short-lived response by the dollar, with geopolitical headlines quickly back in the driver’s seat.
EUR: Fed Dot Plot in Focus as EUR/USD Risks a Pullback
Today will be about war developments and the Fed for EUR/USD. As discussed above, we see upside risks for the dollar from a hawkish Dot Plot revision, and EUR/USD may pull back to the 1.150 handle.
The ECB meets tomorrow (here is our preview) and might need to take into account yesterday’s very weak ZEW ‘expectations’ survey, which fell to an 11-month low on war-related fears. Unlike the Fed, the ECB only has an inflation mandate, but history tells us the economic outlook plays a major role too.
Perhaps concerns about the growth hit and the temporary nature of some energy shocks could prompt some pushback against markets’ ultra-hawkish bets. We do see some dovish risks tomorrow, although the implications for the euro may not be huge given reduced sensitivity to short-term rate differentials of late.
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