Dollar Plummets on Warsh's Hawkish Shift, BoE Meeting Looms

The US dollar has experienced its sharpest decline in two weeks due to concerns that the Federal Reserve will not raise interest rates. The new Fed Chair, Kevin Warsh, emphasized that the rally in Treasury yields is tightening financial conditions and holding back price growth. Investors interpreted this as a sign of an extended pause on monetary policy tightening.

The probability of a federal funds rate hike in September has fallen from 75% to 65%, and the likelihood of two hikes in 2026 has dropped from 51% to 44%. This led to a weakening of the US dollar against major peers, despite falling stock indices, a rally in Treasury bond yields, and rising oil prices.

However, Commerzbank believes that the rally in Brent crude will not necessarily weigh on the EURUSD and GBPUSD. It is leading to a rise in inflation expectations in Europe and an increased likelihood of policy tightening by the ECB and the Bank of England. At the same time, inflation expectations in the US are not rising, nor is the likelihood of Fed monetary tightening.

The Bank of England meeting could provide sterling support. Investors do not expect a rise in the repo rate but anticipate hawkish rhetoric amid the escalating conflict in the Middle East and rising energy prices. Oil and gas prices are higher than they were at the time of the Committee's previous meeting.