The US Dollar (USD) consolidated its Fed-inspired gains at the start of the week, with the Dollar Index (DXY) trading firmly near 100.35, up 0.15% for the day, following a more than 1% rise in the previous week fueled by the Federal Reserve's hawkish outlook [3][4]. The Fed raised interest rates by 25 basis points to 3.75%-4.00% last week, its first hike in three years, and signaled at least one more increase this year, with the CME FedWatch tool showing an 88% probability of another hike before year-end [1][4][6]. Fed Chair Kevin Warsh emphasized that inflation remains unacceptably high, with recent readings showing no meaningful improvement, and Minneapolis Fed President Neel Kashkari reiterated that inflation risks extend beyond oil prices and must be addressed alongside robust growth and productivity [4][6].
The British Pound (GBP) remained under pressure against the USD, trading around 1.3375, down nearly 0.15% for the day, as the Bank of England (BoE) held rates steady at 3.75% with a 6-3 vote, undermining GBP positioning amid a dovish stance [1]. Analysts at Danske Bank noted that the BoE's decision triggered GBP weakness and lower rates, especially given hawkish market expectations prior to the meeting [1]. The Euro (EUR) also consolidated losses against the USD, holding below 1.1500, as political uncertainty in Germany offset the positive impact of lower oil prices. The CDU party suffered a sharp defeat in state elections, obtaining only 4.9% of the vote, its worst postwar result, while the AfD claimed victory [5]. Brent oil prices dropped to near $98.00, almost 7% below last week's highs, as Saudi Arabia increased supply volumes [5].
Market heat maps showed the USD as the strongest major currency, particularly against the Japanese Yen, with a 2.28% gain over the past week [3][4]. The EUR/JPY cross traded near 180.40, extending gains for a second day but maintaining a bearish bias below the 50-day EMA, with immediate support at 179.83 and resistance at 182.65 [2]. Silver (XAG/USD) fell to around $65.80 per troy ounce, as investors tracked Middle East developments and their impact on inflation and rates. The FXS Fed Sentiment Index fell by 1.47 points to 150.61, indicating a modest softening in perceived hawkishness but remaining firmly above neutral, suggesting continued restrictive policy [6].
Geopolitical tensions remained elevated, with Yemen's Houthi forces attacking sensitive sites in Riyadh and Iran ruling out reopening the Strait of Hormuz or returning to US negotiations until conditions are met [1][6]. Ukraine launched a drone and missile assault targeting Moscow, further complicating the global risk landscape [6]. US President Donald Trump is scheduled to meet Chinese President Xi Jinping later in the week, with markets eyeing potential developments in US-China relations and possible AI dialogue [1][3][6].
Analysts at Nordea and ING maintained forecasts for further Fed hikes, with Nordea expecting two more increases and ING targeting EUR/USD at 1.160 by year-end, citing similar front-end swap profiles for EUR and USD and a dovish repricing likely to be similar in size [3][5]. The focus for traders this week will be on speeches from influential FOMC members, including Chicago Fed President Austan Goolsbee, and preliminary PMI figures from the UK and US [1][4][5].
CONCLUSION
The US Dollar remains supported by the Federal Reserve's hawkish stance and resilient US economic data, while geopolitical tensions and political uncertainty in Europe weigh on other major currencies. Market participants are closely watching upcoming Fed speeches and US-China talks for further direction. The outlook favors continued USD strength and cautious sentiment across FX and commodity markets.