The US Dollar held near Monday’s peak ahead of the Federal Reserve’s two-day policy meeting, with the decision due on Wednesday. The US Dollar Index (DXY), which measures the greenback against six major currencies, hovered around 99.70 as it retained earlier gains.
Markets are positioned for the Fed to keep rates unchanged at 3.50%–3.75%, after US inflation picked up in recent months amid higher energy prices linked to Middle East tensions. Attention is also on a peace framework signed on Monday between the US and Iran and the possible reopening of the Strait of Hormuz, while participants await details of an “a page and a half” document to clarify whether passage remains toll-free. Iran has previously sought recognition of its authority near Hormuz in order to charge tolls on transiting ships.
Positioning for Fed Decision and Dollar Volatility
With the Federal Reserve decision due tomorrow, we are positioning for heightened volatility in the US Dollar. The market consensus points to rates being held steady in the 3.50%-3.75% range, which seems justified given the latest Consumer Price Index (CPI) reading of 3.4% is still well above target. This lingering inflation supports a cautious stance from the new leadership under Chairman Kevin Warsh.
We see the US Dollar Index holding firm near 99.70, but we should be prepared for a sharp move following Wednesday’s announcement. Given the DXY traded in a higher 104-105 range for much of early 2026, any unexpectedly hawkish forward guidance could trigger a significant rally. We are looking at short-dated options strategies to trade the potential breakout in either direction.
Energy Markets, Iran Peace Framework, and Inflation Outlook
The recent US-Iran peace framework adds a complex new layer to our inflation outlook. While the eventual reopening of the Strait of Hormuz could lower energy costs over time, West Texas Intermediate (WTI) crude remains elevated around $78 a barrel, reflecting uncertainty. We anticipate that the Fed’s guidance will have to acknowledge this potential for both near-term price pressures and long-term disinflation from energy markets.
We are closely watching for any details to emerge from the signed document concerning tolls in the Strait of Hormuz. The introduction of new shipping tolls would counteract some of the disinflationary effects of the peace deal and could impact energy derivative pricing. This uncertainty makes us cautious about taking on large, directional bets on crude oil until the terms are clarified.
