The U.S. dollar has just hit a two-month high. Traders are massively adjusting their positions amid growing expectations of another Fed rate hike. This hasn't been seen since April. 💵
🔍 What’s happening?
The greenback is gaining strength against all major currencies. The USD/JPY is climbing to 160.2570 at the time of writing, while the EUR/USD is falling to 1.1533. The dollar index (DXY) is breaking through major technical resistance levels it hasn’t touched since early April.
This movement is driven by a radical shift in market expectations. Implied probabilities derived from Fed rate futures now indicate a serious chance that the U.S. central bank will raise its benchmark rate again by the end of summer 2026. This marks a dramatic reversal from the consensus at the start of the year, which had anticipated an extended pause.
💡 Why does this matter?
For the forex trader, this is a clear signal. The cycle of monetary easing could be over, or even reversed. All major pairs involving the dollar (EUR/USD, GBP/USD, AUD/USD) are under pressure. The Japanese yen is suffering particularly hard, with USD/JPY dangerously approaching the psychological threshold of 161—a level that has triggered interventions by the Bank of Japan in the past.
The macroeconomic backdrop is strongly in the dollar’s favor. The U.S. economy is holding up better than expected, inflation remains stubbornly around 3%, and the latest employment figures surprised on the upside. In contrast, the ECB and the BoE are continuing their dovish (accommodative) stance, which further widens the interest rate gap between the United States and the rest of the developed world.
📊 Our view
We are clearly bullish on the dollar in the short term. The technical momentum is there, and so is the macro picture.
For us, the real question isn’t whether the dollar will rise, but by how much. US inflation data in the coming weeks will be decisive. If the CPI (Consumer Price Index) confirms a further acceleration, Jerome Powell will have no choice but to put rate hikes back on the table. The market is already anticipating this scenario, hence the dollar’s rise. On the European front, the ECB remains locked in its growth-supportive rhetoric, with Christine Lagarde reiterating that it is too early to tighten policy again. The monetary policy gap between the Fed and the ECB could widen further, which would automatically favor the dollar against the euro.
We expect the EUR/USD to fall toward 1.14 in the coming weeks if the trend continues. For FR traders: prioritize short EUR/USD positions with tight stops above 1.16, and closely monitor Fed communications.
✅ Key takeaway
- The dollar hits a two-month high against major currencies
- Markets are betting on a Fed rate hike by late summer 2026
- EUR/USD drops to 1.1533, USD/JPY climbs to 160.2570
- The Fed/ECB monetary policy gap continues to widen
- U.S. CPI data in the coming weeks will be decisive for the outlook
What do you think? Can the dollar sustain this rally through the end of summer, or are markets overreacting to the Fed’s hawkish stance?
🔎 See also
For more insights, check out all our Forex analysis on ActuTrading Forex 📈
Source: Investing.com, market data
