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Dollar set to stabilize as Fed path hinges on inflation easing

FXStreet notes that investors expect the Fed to keep rates on hold through 2026 and then begin gradual cuts in 2027, with Middle East energy risks in focus.

Reported · Written up by our desk · Central Banks

UOB strategist Alvin Liew assessed the US inflation and the Federal Reserve policy outlook after the July CPI report, saying headline and core inflation are still above the Fed’s 2% target, but appear to be easing gradually. In UOB’s view, headline CPI is set to average 3.5% and core CPI 2.8% in 2026.

Liew’s framework suggests the Fed is likely to keep interest rates on hold through 2026 before starting gradual cuts in 2027. He also flagged that the CPI outlook remains highly sensitive to geopolitical developments in the Middle East, particularly if regional tensions ease and energy prices stay stable or fall.

In FXStreet’s market wrap, the US dollar stabilized after a CPI-driven sell-off, as cooling inflation reduced expectations for an aggressive Fed rate hike in September. The report said the next key US data point is the PPI release, while traders remain watchful for any rebound in energy prices that could reignite inflation concerns.

FXStreet also pointed to broader FX moves in the same session, including GBP/USD holding near 1.3500 after mixed UK GDP and industrial data failed to lift the British pound, and EUR/USD edging modestly flat above 1.1500 as the dollar consolidates its CPI losses.

Latest closeEUR/USD 1.153 ▼0.2%|GBP/USD 1.349 ▼0.1%

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