Fx daily risks skewed to a stronger dollar

Key arguments

• The Fed, led by Kevin Warsh, is likely to hike rates in September given sticky inflation and a strong economy.
• Rising energy prices boost hawkish rate expectations, supporting the dollar.
• Fiscal concerns and potential Treasury market interventions are a risk, but the cyclical Fed story should dominate.
• EUR/USD faces headwinds from a more hawkish Fed and higher energy prices, with downside to 1.15.
• Bank of Japan hawks remain a minority; USD/JPY likely to stay in 160/162 as Fed policy dominates.
• Bank of Canada expected to hold rates steady, with modest tightening priced for January.
• Trade tensions in North America cloud the CAD outlook, supporting USD/CAD upside.
• A modest discount to EUR/USD and an upside target for USD/CHF are likely.

Corresponding source evidence

1. As Francesco Pesole highlighted yesterday, there remain fears that Treasury Secretary Scott Bessent will dip into his large toolkit again to support the bond market and traders will look to hit a bid in USD/CHF to express the dollar debasement trade.
2. But the new baseline seems to be that the Fed will, after all, hike rates in September.
3. Fed Chair Kevin Warsh has made it reasonably clear that inflation is not falling quickly enough to target and, given a reasonably strong economy, the Fed will need to act.