US dollar outlook strengthens after Fed's hawkish hold

Could the Fed keep markets guessing for longer than expected? A hawkish pause has boosted the US dollar outlook, as traders increasingly price in higher interest rates and further pressure on EURUSD.

On Wednesday, 17 June, the Fed held the funds rate at 3.5 - 3.75% as widely expected, while the dotplot suggested at least one hike by the end of 2026 is more likely than many participants had expected. Following on from my colleague Van Ha Trinh’s article, which accurately predicted the overall outcome of the Fed’s meeting, here I’m looking at the drivers behind the decision, expectations of hikes later in the year, and the chart of euro-dollar in the aftermath.

50% lower spreads on forex

Experience the tightest spreads on the market across 28 top pairs.*

Trade now

*

Exness Pro account spreads were 50% lower than the average spreads of 15 other brokers on 28 FX majors and minors, in the week of 5-10 April 2026, comparing tightest spread-only accounts.

Markets now expect at least one Fed rate hike in 2026

Many traders expected the Fed to hold on 17 June, but there was considerable uncertainty about the timing of hikes. As Ha noted in his preview article, there was a reasonable possibility before the latest meeting that the Fed might hike as early as September 2026. That now seems to be the base case, but some uncertainty persists since about 63% of participants at the time of writing expect at least one hike by 16 September, according to CME FedWatch.

There has also been a significant change to FedWatch in December 2026, with the large majority of participants now expecting at least one hike by then.

The probability of a hike by the Fed in December 2026 surged dramatically after the meeting on 17 June, with a large majority of participants now expecting at least one hike by the end of the year. Source: CME FedWatch

Before 17 June, the probabilities of the Fed holding into 2027 and hiking once this year were approximately even, but now the likelihood of a hold to the end of the year seems very low. Expectations for two or more hikes rose to nearly 45%.

Why inflation and jobs data support a hawkish Fed

Ha wrote about likely sticking to energy inflation, which I agree seems like a probable scenario. The Fed’s statement on 17 June made specific reference to inflation being above the 2% target. However, I want to add here that while a sustained drop in inflation over the next few months is unlikely, it’s still a possible scenario which I’m preparing for. You probably remember 2021’s inflation not being as “transitory” as the Fed initially expected; I wouldn’t be very surprised to see oil dropping, the job market returning to 2025’s averages, and a hike by the Fed becoming less likely in late summer and autumn, although this scenario is unfavourable right now.

 March-April 2026 were the first consecutive months with positive NFPs for about a year. I agree with Ha that the job market in the USA seems resilient for now; however, that could change quickly, as we saw last summer. I think it’s too early to hail three good NFPs in a row as a confirmed positive trend in the job market, so I’d prefer to see at least a couple more strong job reports before being confident in the more hawkish possibilities for the Fed.

I think we got an early insight into Kevin Warsh’s likely approach as the Fed’s new chairman from the statement on 17 June. The word count was cut significantly from the norm under Jerome Powell, and the syntax and vocabulary were overall much simpler than what you’d normally expect from a central bank. Dr Warsh has criticised the Fed’s tendency to give too much forward guidance indirectly, so it seems to me that he’s started to do something about this.

EURUSD forecast: Why further downside is possible 

Euro-dollar was on trade for its largest daily decline since 30 January after the Fed’s latest meeting, but recovered some of the losses. Source: Exness’ MT5

Looking at the 4-hour EURUSD chart, you can clearly see the down candle around the Fed’s meeting and press conference, with the price having briefly touched a low of nearly three months before a modest recovery. While the ECB hiked its rates less than a week before the Fed, the divergence between the main refinancing rate and the Fed’s funds rate remains 1.1-1.35% and is now unlikely to shrink much, if at all, by the end of 2026. Overall economic conditions seem to favour the dollar with higher inflation, a stronger job market, and much better growth in the USA compared to the eurozone.

The obvious longer-term target for selling would be around 1.14 USD, but I think it’s questionable whether the price might continue that far in the near future. However, with volume having remained relatively low apart from during the Fed’s comments on 17 June and the moving averages bunched closely together not far above the price, an ongoing strong bounce also seems unlikely to me. I’m looking ahead to PCE and final US GDP for the first quarter on 25 June for the next possible data-driven movement.

The tightest spreads in the industry

Outperforming 15 other brokers with 50% lower spreads across 28 forex pairs.*

Try free demo

*

Exness Pro account spreads were 50% lower than the average spreads of 15 other brokers on 28 FX majors and minors, in the week of 5-10 April 2026, comparing tightest spread-only accounts.

Final thoughts: My outlook for the dollar and EURUSD

In my view, the balance of risks still favors a stronger dollar in the near term, as markets increasingly price in the possibility of further Fed tightening in 2026. While inflation and labor market data could still shift expectations in the months ahead, I think the current combination of relatively strong US economic conditions and a hawkish Fed supports a constructive US dollar outlook and leaves EURUSD vulnerable to further downside.

Disclaimer: This reflects my personal opinion and is provided for informational purposes only. It does not constitute investment research, financial advice, or a recommendation to buy or sell any financial instrument. Trading involves risk, and past performance is not indicative of future results.