On July 1, Federal Reserve Chair Kevin Walsh delivered a landmark policy adjustment at the Sintra Global Central Banking Forum in Portugal, which directly altered the pricing logic of the US dollar.

The Fed officially abolished the nearly 20-year-old mechanism of releasing advance interest rate path forecasts. All future decisions on rate hikes, rate cuts and interest rate maintenance will rely entirely on current economic data, without releasing biased remarks to the market in advance.

Supplementary remarks on balance sheet reduction: The current 18-week phased balance sheet reduction intensity is insufficient to digest the $6.7 trillion balance sheet, yet large-scale deep balance sheet reduction will be postponed until after 2027. Expectations of tightened short-term market liquidity have cooled, weakening the medium and long-term bullish momentum of the US dollar.

Clear inflation bottom line: The rigid 2% inflation target will not be abandoned, and the Fed will not shift to loose policies in advance due to cooling employment. As long as core inflation stays above the threshold, the door for interest rate cuts in 2026 will be completely closed, which prevents a unilateral sharp decline of the US dollar and pushes the US dollar into a wide sideways range at high levels.

Direct market impact: Without a stable expectation anchor, the volatility of the US dollar keeps rising. Monthly non-farm payroll and CPI data can trigger hundreds-of-pip fluctuations in major currency pairs, significantly amplifying risks of short-term speculative trading.

II. Divergent Remarks from Fed Officials (Latest Statements on July 7, Splitting Foreign Exchange Expectations)

Hawkish Camp (Restrain Rebounds of Non-US Currencies and Support the US Dollar)

Governor Waller: At present, inflation risks are far more prominent than labor market risks. Slight cooling in employment cannot ease price pressures, and the Fed may resume rate hikes if inflation rebounds. He opposed excessive market bets on loose policies and held that a September rate hike remains a high-probability option.

Former St. Louis Fed President Bullard: The Fed will most likely keep interest rates unchanged at the July policy meeting, yet release hawkish wording to lay the groundwork for a September rate hike. Core CPI has stayed above the 3% warning line; falling oil prices can only ease inflation temporarily and cannot replace tight monetary policies.

Dovish Camp (Suppress the US Dollar, Benefit Euro, Japanese Yen and Offshore RMB)

New York Fed President Williams (the third most important figure of the Fed): Eased tensions between the US and Iran have dragged international crude oil prices down, and energy components will continuously push down overall inflation. Markedly cooled employment data will restrict further interest rate hikes. Monetary policy is now in a balanced and appropriate range, and there is no immediate need for additional tightening.

III. US Fundamental Data Guiding Fed Policies (Basis for Foreign Exchange Pricing)

Significantly Cooled Employment Data (Released in June, Negative for US Dollar Bulls)

June non-farm payrolls increased by only 57,000 against the market expectation of 110,000. The employment data of April and May were revised down by a total of 74,000. The four-week average of ADP private-sector employment dropped to 21,000, while the year-on-year wage growth slowed down simultaneously.

Market interpretation: The cooling labor market greatly weakens the logic of successive rate hikes in July and September. Interest rate futures rapidly priced down hike odds, triggering large-scale profit-taking among US dollar bulls.

Inflation Status: Overall Cooling yet Highly Sticky Core Service Inflation

US CPI rose 4.2% year-on-year in May, with core CPI at 2.85%. Falling gasoline and natural gas prices dragged down overall readings, while inflation in rent, medical care, education and service sectors remained stubborn.

Institutional forecasts: The US may fail to hit the 2% inflation target until late 2027, sustaining high interest rates in the medium and long run, thus forming a hedging market pattern: short-term downward pressure on the US dollar balanced by medium-long-term support.

Upcoming Key Data: June CPI to be released on July 14 will be the last core inflation report before the July 29-30 FOMC meeting, directly determining the short-term direction of the US dollar.

IV. Real-Time Pricing of CME Interest Rate Futures (Updated on July 8)

The current benchmark interest rate range stands at 3.50%-3.75%:

July policy meeting: 74.9% probability of keeping interest rates unchanged, with merely 25.1% probability of a 25-basis-point hike, a sharp drop from nearly 50% hike odds at the end of June.

September policy meeting: 66.9% probability of a 25-basis-point hike, serving as the only major tightening window in 2026.

Full-year market consensus: No interest rate cuts are priced for 2026. The market only prices two scenarios: one single rate hike or steady high interest rates for the whole year, completely reversing the March market forecast of interest rate cuts within 2026.

V. US Dollar Index and Trend of Major Foreign Exchange Pairs (Closing Price on July 7, Asian Session on July 8)

US Dollar Index (DXY)

It fluctuates within the range of 100.85-101.70 at high levels. The latest CFTC position data shows that net long positions of the US dollar hit $39.7 billion, a record high since 2015. Such extremely crowded long positions carry risks of sharp correction driven by concentrated profit-taking. Geopolitical conflicts in the Middle East bring periodic safe-haven buying, limiting deep declines.

EUR/USD

It rebounded from the low of 1.085 to fluctuate around 1.096. Cooling expectations for Fed rate hikes and sustained tightening by the European Central Bank have narrowed the interest rate differential between the US and Europe, supporting the euro’s uptrend. Key resistance is at 1.102, and key support is at 1.088.

USD/JPY

It retreated from the peak of 161.93 to around 159.2. Weakened hawkish expectations of the Fed eased the depreciation pressure on the Japanese yen. Coupled with continuous tightening by the Bank of Japan, two-way trading intensified with a fluctuation range of 155-165.

USD/CNH (Offshore RMB)

The weaker US dollar drove a partial recovery of the offshore RMB, marginally alleviating external liquidity pressure. Its trend moves in line with US Treasury yields.

Other currency pairs: Australian dollar and Canadian dollar fluctuate under the dual influence of commodities and the US dollar. USD/CHF consolidates around 0.8066. The Fed’s unwavering stance on fighting inflation restricts sharp appreciation of the Swiss franc.

VI. Countermeasures of Global Central Banks (Exchange Rate Interventions Triggered by Fed’s High Interest Rates)

Sustained high interest rates of the Fed forced central banks worldwide to use foreign exchange reserves to stabilize domestic currencies, indirectly affecting global supply and demand of foreign exchange.

Bank of Korea: It sold a net $13.628 billion in the first quarter of 2026 for foreign exchange intervention, marking six consecutive quarters of US dollar sales to curb depreciation of the Korean won.

National Bank of Denmark: It purchased 700 million Danish kroner in June to maintain the euro peg mechanism, marking its first market intervention since January 2023.

State Bank of Vietnam: It publicly stated that it would continuously deploy foreign exchange reserves to prop up the Vietnamese dong and offset capital outflow pressure caused by a strong US dollar.

VII. Correlation Logic Between Gold and the US Dollar (Core Hedging Instrument Linked to Fed Policies)

Spot gold surged sharply on the day of Chair Walsh’s speech at Sintra and firmly stood above $4,100 per troy ounce, driven by three core factors:

Slower short-term balance sheet reduction and fading rate hike expectations pushed down US real interest rates, lifting allocation demand for non-interest-bearing precious metals.

The Fed’s cancellation of fixed forward guidance raised overall macro uncertainty, sustaining safe-haven demand for gold.

Consensus among institutions: If the Fed keeps interest rates unchanged at the July meeting, gold’s bullish trend will continue, accompanied by renewed downward pressure on the US dollar.

VIII. Upcoming Key Timelines (Determine the Overall Foreign Exchange Trend from July to September)

July 14: US June core CPI inflation data, the most forward-looking indicator before the July policy meeting.

Late July: Semi-annual monetary policy testimony of Chair Walsh to Congress, a new window for policy signals that will greatly lift foreign exchange market volatility.

July 29-30 FOMC Meeting: The pivotal policy event in the second half of 2026. Steady interest rates will trigger a medium-term correction of the US dollar, while signals of a September rate hike will reignite the US dollar’s rally.

Monthly non-farm payrolls and PCE price index: Without forward guidance, a single data release can reverse the short-term trend of foreign exchange markets.

IX. Mainstream Foreign Exchange Trading Strategies of Institutions

Short term (within July): The US dollar will fluctuate widely at high levels with fierce competition between bulls and bears. The mainstream strategy is to open light short positions on the US dollar on rallies, betting on steady interest rates at the July policy meeting; safe-haven buying driven by geopolitical conflicts serves as downside protection.

Medium term (from post-July meeting to pre-September): If CPI and employment data keep cooling and the market prices out a September rate hike, the US Dollar Index may break below 100, ushering in a sustained recovery for the euro, RMB and gold.

Reverse risk scenario: A rebound in crude oil prices and hotter-than-expected core inflation may push the Fed to raise interest rates in September, triggering a new round of US dollar rally and putting all non-US currencies under depreciation pressure.

Disclaimer: The above content is only a collation of international macroeconomic information and does not constitute any investment advice for foreign exchange, futures or precious metal transactions.