Dollar eases from an 18-month high as traders price a Fed pause now and 75bp of hikes later

The retreat is small. From Monday's 102.61 to Tuesday's 102.29 the dollar index fell 0.32 points, or 0.31% ^[20], and it still sits within a third of a percent of its highest since April 2025 ^[19]. According to channelnewsasia.com, the prevailing market view is that Trump will avoid escalation in the Middle East and Ukraine because it could dent his prospects before the midterms ^[12]. The same report says the dollar moved in line with oil ^[1].

The Fed numbers are larger. A month earlier the market gave a hold 51%; it now gives 80% ^[7], a jump of 29 points ^[16], while the same CME FedWatch reading still shows 75 basis points of tightening by late 2027 ^[7]. At 25 basis points a move, that is three hikes ^[17]. Traders have taken October out and left the tightening in, pushed to later dates.

The report does not say what the market expects from Wednesday's September CPI ^[8], so a hawkish surprise has no number attached. HSBC's Daragh Maher put a limit on it. "While markets would react to a hawkish surprise, one CPI release may not be enough to undo a pause narrative that senior officials have seemed keen to establish," Maher said ^[9]. A modest upside surprise, he argued, may strengthen confidence in December's already-priced hike without changing October or the dollar materially ^[10].

The euro's risk sits with the ECB. Macquarie's Thierry Wizman, referring to France's fiscal trajectory and the energy shock ^[15], said: "The prospect for good news coming in the euro area is slim, and any further bad news would prompt the ECB to slow the pace of rate hikes, or end them altogether" ^[13]. A slower ECB, he added, "would likely cause further euro/dollar downside" ^[14].

We think the dollar's dip says little about geopolitics. It is 0.31% ^[20], it came on a day oil fell on supply news ^[3], and the containment case rests on a stated intention ^[2]. From here the path can run three ways. An in-line print leaves the pause narrative alone and the index near 102.29 ^[19]. A hot one pulls October toward a hike and puts the 102.61 high back in play ^[19]. An oil rebound on any Middle East or Ukraine headline would restore the dollar's support against the euro and yen ^[11], whatever the CPI says.

In our view the Fed leg decides the next move, because it has odds attached and the geopolitical leg has a pledge. We would be wrong if the index keeps falling on a day when oil rises or when the CPI runs hot.