US Dollar Strengthens Ahead of Fed Decision Amid Oil Price Decline

Oil prices have dropped significantly after tensions between the US and Iran eased, reducing the risk premium and impacting inflation expectations. The move away from July highs around $100 per barrel of Brent crude gives markets some breathing room, but a real supply disruption would quickly bring energy back into focus.

The US dollar remains strong ahead of the Fed's decision on Wednesday, with mixed signals from real rates and inflation expectations. Real rates continue to rise, even as inflation expectations stay anchored, leaving traders in a difficult spot: they see fewer signs of second-round inflation, but still assign a meaningful risk to tighter Fed policy.

The base case remains a hold at 3.50%-3.75%, though a hike this week has not been fully ruled out, making September even more important for the dollar and the front end of the curve. Fed communication is adding to the uncertainty, with Chair Warsh avoiding setting out a clear rate path.

This week's earnings reports from major tech companies, including Apple, Microsoft, Amazon, and Meta, will test the AI trade after months of heavy capital spending. Strong numbers could steady risk appetite after the Fed, while weaker results would leave markets more exposed, potentially keeping the dollar bid from multiple fronts.