Fed Hawkish Hold May Cap USD Gains

Commerzbank's Antje Praefcke believes that the Federal Reserve under Chair Kevin Warsh is likely to deliver a 'hawkish hold' in its monetary policy decision. This would mean maintaining current interest rates, despite market expectations of at least one rate hike by year-end.

The market has already priced in the possibility of a rate hike, but recent declines in energy prices and a softer June inflation print have reduced the odds of an immediate increase. As a result, the US Dollar may see limited upside, and EUR/USD will be sensitive to any scaling back of Fed tightening expectations.

Praefcke suggests that if the FOMC statement or Warsh's press conference downplays price risks as manageable and temporary, it could lead to a correction in the USD. This would be unlikely, given the recent drop in energy prices and low June inflation rate.