Dollar Rally Gives Way to Hawkish Expectations Amid Middle East Tensions

The US dollar rallied across the board on Wednesday following the FOMC decision, which was seen as more hawkish than expected. The Fed hiked interest rates by 25 bps in an unanimous decision, removing language that inflation remained elevated in part due to supply shocks from the Summary of Economic Projections (SEP). However, the dot plot showed a more dovish tone, projecting just one more rate hike in 2026, with rates staying higher throughout 2027 before rate cuts in 2028.

This shift in expectations led to an increase in probability for a rate hike in October, rising to 57%. The market is now watching the situation in the Middle East closely, as $100 oil, rate hikes, and elevated bond yields might put more pressure on Trump to end the war. A de-escalation phase may be underway, with Trump calling a meeting with Gulf leaders on Tuesday to discuss next steps.

The EUR/USD pair remains skewed to the downside, breaking below the key 1.1560 support and extending losses into new lows following the FOMC decision. The natural target for sellers is the major support zone around 1.14, while buyers may step in with a defined risk below the support to position for a rally.