Dollar Under Pressure as Markets Price in Fed Hold and Low Oil Prices

The US dollar may come under pressure today following the Federal Reserve's (Fed) announcement on interest rates. The market is pricing in a 7bp chance of a Fed hike, implying a mechanical correction lower in front-end USD rates if rates are kept unchanged.

Despite softer economic data and de-escalation headlines weighing on the dollar yesterday, it has shown little sensitivity to the recent decline in oil prices. However, this resilience will be tested heavily today as markets react to the Fed's decision.

A Fed hold may trigger an unwinding of precautionary USD positioning, allowing the dollar to reconnect with lower oil prices. This could lead to a test of 101.0 in DXY by the end of the week if constructive headlines from the Gulf return.

The European Union (EUR) pair may also see gains as markets maintain a broadly constructive view on further de-escalation. A sustainable move back above 1.15 would require dovish Fed repricing and a stabilisation in risk sentiment, which could lead to a move into the 1.1400-1.1450 range over the coming days.

The AUD/USD pair has been impacted by softer Australian inflation data, with markets paring back RBA tightening expectations from around 20bp before the release to 13bp at the time of writing.