USD Outlook: Dollar Rally Remains Muted Amid Central Bank Meetings and Geopolitical Uncertainty

Central Banks Take Center Stage – But Geopolitics Disrupts the Narrative

This week was already expected to be volatile with several key central bank meetings, including the Federal Reserve, set to signal shifts in inflation-growth policy dynamics. However, the spotlight has shifted as geopolitical tensions in the Middle East dominate global headlines and complicate the macroeconomic outlook.

The US Dollar has failed to extend its recent gains, as investors adopt a cautious stance ahead of the FOMC's interest rate decision and the broader implications of rising energy market volatility driven by the Israel-Iran conflict.

Middle East Crisis: A New Variable in Inflation Forecasting

Markets are increasingly pricing in the possibility of energy-driven inflation shocks as the Middle East conflict escalates. This has created a challenging environment for central banks, especially the Fed, as they try to balance growth with inflation control.

The implications for the US Dollar are twofold:

• Muted demand as risk sentiment remains fragile.
• Potential volatility if inflation projections are revised upwards due to surging oil prices.

Dollar Index Flat as Markets Await Fed Signal

The Dollar Index (DXY) is trading sideways as traders await the Fed's policy statement. With geopolitical risk and protectionism shaping the backdrop, clarity on rate trajectories will be key to unlocking further USD momentum.

Key Focus Areas:

• FOMC policy outlook
• Energy price impact on inflation
• Safe-haven vs growth narrative in FX markets
• Global central bank responses (ECB, BoJ, SNB)

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