The next FOMC policy meeting will be held from July 28 to 29. The Fed will officially enter the blackout period starting July 24. Voting Fed officials are prohibited from making public comments related to monetary policy. Once the blackout period begins, market participants cannot obtain policy signals from official speeches and must rely on economic indicators, US Treasury yields and interest rate futures pricing to infer market expectations. The current federal funds rate remains within the range of 3.50%–3.75%.

According to the latest pricing from the CME FedWatch Tool, the market prices in approximately a 74% probability that interest rates will stay unchanged at the July meeting, alongside a 26% probability of a 25-basis-point rate hike. The odds of a rate hike at the September FOMC meeting have climbed to 66%, and market pricing for at least one additional rate increase within 2026 stands at nearly 88%. Expectations for interest rate cuts in 2026, which were widely priced in previously, have almost completely faded. The narrative of "higher interest rates for longer" has once again become the core pricing logic for US dollar assets.

Speeches delivered by Fed officials ahead of the blackout period reveal clear internal divisions. Hawkish members repeatedly stress that inflation risks cannot be overlooked. Cleveland Fed President Hammack stated that core inflation remains sticky. If tensions in the Middle East push crude oil prices higher, energy-driven inflation may re-emerge. Therefore, the Fed must retain the option to implement additional monetary tightening. Fed Vice Chair Jefferson also indicated that the Fed may revisit further rate hikes if inflation fails to register sustained and steady declines. On the other hand, Chicago Fed President Goolsbee, who holds a neutral-to-dovish stance, pointed out that many current economic indicators are vulnerable to temporary disturbances and lack reliability. The labour market is gradually cooling, and aggressive additional rate hikes would raise the risk of a hard landing for the US economy. He advocated a wait-and-see approach until consecutive batches of data confirm inflation trends.

The latest US economic data sends mixed signals. June CPI and PPI came in below market forecasts temporarily easing pressure on the Fed to deliver an immediate rate hike. Meanwhile, initial jobless claims surprised to the upside once again, reflecting ongoing resilience in the labour market. Such conflicting data prevents the formation of a unified market consensus. The US Dollar Index has traded sideways within a range recently, edging higher during the New York session to trade around 101.20. US Treasury yields stay elevated, with the 10-year Treasury yield stabilizing above 4.63%. Elevated Treasury yields underpin the US dollar while continuing to weigh on gold, a non-yielding asset.

Multiple institutions have identified three plausible scenarios for the July Fed policy meeting. The baseline scenario involves steady interest rates alongside an updated dot plot that upgrades inflation projections and keeps the door open for additional rate hikes this year. An overall hawkish tone would be supportive for the US dollar. The dovish scenario entails a pause in rate hikes with references to future tightening removed, putting downward pressure on the dollar. The extreme scenario consists of an emergency 25-basis-point rate hike, triggering a sharp rally in the US currency. Before the meeting outcome is announced, the US dollar is unlikely to sustain a directional trend, and volatility is expected to widen gradually.

EUR/USD has faced persistent downward pressure over recent trading sessions and currently trades near the 1.1400 level. The European Central Bank (ECB) will hold its policy meeting on July 23, and markets overwhelmingly expect interest rates to remain on hold. Eurozone inflation indicators declined further in June, with the HICP year-on-year reading falling to 2.8%. The clear disinflation trend limits scope for further ECB rate hikes.

Nevertheless, risks remain. Ongoing Middle East conflicts push crude oil prices upward. Sustained rises in energy costs could slow inflation cooling across the euro area and delay the timeline for ECB rate cuts. Uneven economic recovery persists within the bloc; Germany’s manufacturing sector remains weak, and sluggish domestic demand caps the euro’s upside potential over the medium to long term. Near-term euro movements will be affected by both the ECB policy announcement and swings in the US Dollar Index. Should the Fed deliver hawkish policy signals, the euro may test support at 1.1350.

The British pound also weakened during the overnight session, changing hands around 1.3378. Inflation in the UK is stickier compared with the US and the eurozone, with services prices remaining high. Markets expect the Bank of England to refrain from launching a rate-cut cycle in the near term. However, weak UK economic growth and subdued household consumption restrict further gains for sterling.

Foreign exchange options data shows a notable uptick in put option volumes on the pound recently. Investors warn that sterling will face intensified downside pressure if global risk aversion surges and the US dollar strengthens. The near-term resistance level stands at 1.3430, while key support lies at 1.3320.

USD/JPY advanced once more to settle above 163, hitting the weakest yen levels since 1986. The Japanese yen ranks as the poorest performer among G10 currencies. The root cause lies in substantial divergence between US and Japanese monetary policies. The Bank of Japan’s next policy meeting will take place on July 30–31. The mainstream market consensus anticipates unchanged rates, meaning additional monetary tightening will arrive far later than in the United States.

Wide long-term sovereign yield differentials between the US and Japan sustain carry trades involving yen selling. Faced with sharp yen depreciation, Japan’s Minister of Finance has repeatedly issued warnings, stating authorities are closely monitoring exchange rate fluctuations and stand ready to implement bold intervention measures when necessary. Markets remain vigilant over potential official FX intervention, which could trigger a rapid corrective decline in USD/JPY. In its latest report, Goldman Sachs raised its medium-to-long-term target for USD/JPY to 165, reflecting institutional expectations of prolonged yen weakness.

The Australian dollar, classified as a commodity risk currency, oscillates around the 0.70 mark. On one hand, geopolitical conflicts fuel commodity inflation, fostering expectations that the Reserve Bank of Australia (RBA) will maintain the option of further rate hikes, lending support to the aussie. On the other hand, risk-off capital flows into the US dollar, and deteriorating risk sentiment cap upside for AUD. Australia’s employment data is due for release this week; wage and labour market readings will directly shape market expectations for the RBA’s August policy decision. Resistance sits at 0.7050, with core support at 0.6950.

The Canadian dollar moves in tight correlation with international crude oil prices. Heightened tensions in the Middle East lift oil prices, supporting Canada as a major oil exporter and offering temporary backing to the loonie. The Bank of Canada previously noted that although inflation has cooled, rebounds in energy prices will postpone rate cuts, and the scope for easing within this year will be limited. USD/CAD currently trades near 1.4100. Future price action will track both crude oil fluctuations and shifting expectations around US-Canadian interest rate spreads.

Persistent tensions across the Middle East have raised market concerns over disrupted shipping through the Strait of Hormuz, pushing crude oil prices onto an upward trajectory. This factor transmits dual forces to FX markets. Higher oil prices lift global inflation expectations, forcing major central banks including the Fed and ECB to maintain tight policies, which benefits the US dollar. Meanwhile, oil-export currencies such as the Canadian dollar and Norwegian krone gain favour, while energy-importer currencies like the yen face headwinds.

Broadly speaking, prevailing geopolitical risk aversion currently favours the US dollar, and risk-sensitive non-US currencies come under broad selling pressure. Should de-escalation in the conflict materialize, safe-haven buying demand for the dollar will fade, creating opportunities for corrective rebounds in commodity currencies.

Amid mild gains in the US Dollar Index, the renminbi has demonstrated relative resilience. The official central parity rate of USD/CNY was set at 6.7933 on July 22. During the New York session, the onshore renminbi closed at 6.7665, and offshore CNH traded around 6.7690. Domestic markets await key economic policy signals. Near-term renminbi movements mainly follow swings in the US Dollar Index. Seasonal foreign exchange conversion demand from domestic enterprises provides downside support, making large directional moves less likely. Medium and long-term exchange rate trends will hinge on policy timing gaps between China and the United States, alongside the pace of domestic economic recovery.

Indicators to monitor weekly: US initial jobless claims, PMI surveys, University of Michigan inflation expectations; Eurozone CPI and national employment statistics.

Traders at major financial institutions are adopting a wait-and-see stance. Implied market volatility remains low. Investors are cautious about establishing large directional positions ahead of key central bank meetings. The prevailing market pattern consists of range-bound news-driven fluctuations. Bullish and bearish flows shift frequently, creating frequent sharp spikes and whipsaw price action.

Interest rate differentials continue to dominate the medium-to-long-term market structure. As long as expectations of prolonged high US interest rates remain intact, the US dollar will hold downside support. Sustained recovery in non-US currencies will require markets to price in Fed rate-cut prospects, or decisive hawkish signals of additional tightening from individual national central banks.