Dollar Plunges as Fed Officials Signal Rate Hike Pause

The US dollar has experienced its sharpest decline in the past two weeks following Federal Reserve official Kevin Warsh's comments that the Fed may not raise interest rates to combat inflation.

Warsh stated that the rally in Treasury yields is tightening financial conditions and holding back price growth, leading investors to believe that the Fed will extend the pause on rate hikes. As a result, 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 has led to a weakening of the US dollar against major peers.

However, Commerzbank notes that the rising oil prices may not necessarily weigh on the EURUSD and GBPUSD, as inflation expectations are increasing in Europe. The Bank of England's meeting could provide support for sterling, as investors do not expect a rate hike but anticipate hawkish rhetoric amid the escalating conflict in the Middle East and rising energy prices.