The US dollar extended its rally after the Federal Reserve held rates steady, reinforcing a “higher for longer” narrative as inflation risks remain elevated. Rising yields have underpinned USD strength, while safe-haven flows have shifted away from the yen and Swiss franc.
With USD/JPY approaching the key 160 level and USD/CHF breaking higher without the same intervention risks, traders are increasingly focusing on USD strength as a dominant theme across FX markets.
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US Dollar Strength Builds After Fed Decision as USD/JPY Nears 160 and USD/CHF Breaks Out
Fed Holds Steady as Rate Cut Expectations Fade
There was a time when war ensured safe-haven flows swarmed into the Swiss franc and Japanese yen. Yet this time, the US dollar has been traders’ preferred refuge. The war in Iran shows no signs of cooling, the Strait of Hormuz is no closer to reopening, and oil prices remain elevated with little appetite to fall.
This is feeding directly into inflation concerns for central banks. While the current backdrop could eventually trigger an economic downturn if it persists, policymakers remain in a “wait and see” phase of the cycle. In the near term, the more immediate impact is higher fuel costs for consumers, which further reduces already low odds of a Fed rate cut.
The Fed delivered no surprises on this front:
- Interest rate target remains at 3.50%–3.75%
- The dot plot points to just a single cut this year, unchanged from December
- Core PCE inflation was upgraded to 2.7% for 2026, up from 2.5%
- PCE inflation was left at 2.4% for 2026
Trump Pressure vs Fed Policy Independence
The fact the Fed nudged its 2027 inflation forecast up by 0.1 percentage point to 2.1% suggests they expect the war in Iran to linger longer than the Trump administration would care to admit. While no hikes are on the table, they may as well be—especially after Trump called for an emergency meeting to cut rates just two days ago.
While Fed Chair Powell said a rate cut remains possible, it feels more like a hedge. Ultimately, traders are now pricing out the solitary cut for this year, with the probability of rates remaining unchanged through to December rising to 52%.
US Dollar Index Rallies Alongside Yields
A bullish outside day formed on the US dollar index and continued to respect the 10-day EMA. While resistance into the 100 level and May high has caused a bump in the road for bulls, I suspect we’re in a 5-wave move that could see the USD break above the May high. The underlying trend remains strong and pullbacks shallow. I have now revised my higher-timeframe wave C around 102 – which could mark a more meaningful top for the dollar later this year.
Source: ICE, LSEG
US Dollar Leads as Yields Rise, Risk Assets Slide
Source: LSEG
- The US dollar was the strongest currency, rising alongside bond yields, with the 2-year reaching its highest level since August at 3.8%
- The Japanese yen and Swiss franc were the weakest FX majors, sending USD/JPY to a 20-month high and USD/CHF to a 2-month high
- EUR/USD fell 0.7% and formed a bearish engulfing day beneath its January low
- GBP/USD also fell 0.7%, forming a bearish engulfing candle around its monthly S1 pivot
- AUD/USD fell 1% and formed a bearish outside day, although the Aussie remains rangebound between 0.6950–0.7100
- USD/CAD rose 0.3%, although it remains hesitant to break last week’s high as the Canadian dollar finds support from higher oil prices
- Gold futures fell 3%, breaking convincingly below 5000 and printing a daily low just shy of 4800 before recovering to around 4900
- Silver also fell 3% to a four-week low, while copper posted its worst day in six weeks, dropping to its weakest level since December
- Dow Jones futures led Wall Street lower, falling 1.7%, followed by the Nasdaq (-1.5%) and S&P 500 (-1.4%), with all three forming bearish engulfing days
Source: LSEG
Japanese yen (USD/JPY), Swiss franc (USD/CHF) Technical Analysis
USD/JPY Eyes 160 as Yen Weakness Persists
Large speculators remain net-short Japanese yen futures, and asset managers appear close to following. Low expectations for BOJ hikes, alongside a preference for the US dollar over the yen as a safe haven, have pushed USD/JPY to its highest level since July 2024.
Like the US dollar index, the rally in USD/JPY has been solid and continues to respect the 10-day EMA. While there will be growing speculation around potential BOJ intervention if USD/JPY pushes higher, markets typically test those levels to goad the MOF into action—often driving prices well beyond the so-called “intervention level.”
Ultimately, I see a break above 160 as more likely than not at this stage, although we could see a pullback before any such move. Either way, this is a pair to watch. Traders should remain nimble and be prepared for two-way volatility above 160, alongside jawboning from MOF and BOJ officials.
Source: ICE, tradingView
USD/CHF Breakout Gains Traction as SNB Welcomes Weak Franc
A bullish engulfing candle formed on USD/CHF around the December low and 10-day EMA. Unlike USD/JPY, the Swissy faces no immediate threat of central bank jawboning. In fact, a stronger USD/CHF aligns with the SNB’s preference for a weaker Swiss franc.
With no clear resistance nearby, USD/CHF could be the preferred long for bulls looking to avoid the volatility risks associated with potential intervention in USD/JPY.
