FOMC preview: Fed to stay on hold after June’s hawkish shift
The desk anticipates that the Federal Reserve will maintain its current policy stance during the upcoming FOMC meeting on July 28-29, 2026, refraining from rate hikes despite elevated market expectations fueled by rising oil prices. Per the full note from ING, softened inflation and labor market data have diminished the urgency for action, leading to a shift in market sentiment from roughly 80% likelihood of a rate increase to no hikes being priced in. Key indicators such as the June CPI at 0.1% versus expectations of 0.4% and disappointing non-farm payroll growth of just 57,000 underscore this cautious outlook. As seen in our internal research, the consensus target for EUR/USD reflects a level of 1.16, aligning with the Fed's cautious tone.
What the desk is arguing
The desk believes the Federal Reserve’s decision to hold rates steady is supported by recent economic indicators, particularly the lower-than-expected inflation prints for June. The FOMC’s recent Beige Book indicated a muted price inflation environment, which, along with soft labor data, suggests less need for immediate policy tightening. As highlighted by ING, the stronger labor market expectations had previously led markets to anticipate a more aggressive Fed, but the changes in the economic landscape have altered that narrative significantly.
Moreover, the conflicting projections among FOMC participants, with some still expecting a hike by December, illustrate the uncertainty that currently permeates Fed policymaking. The primary economic indicators influencing this decision are the cooler inflation metrics—particularly the CPI and PPI—and the slowdown in job growth, as emphasized in the source commentary.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.16, with a range spread from 1.12 to 1.20 as predicted by firms. Noteworthy targets include: - Goldman: Mar26 1.1800, Dec26 1.1200 - BofA: Mar26 1.1700, Dec26 1.1500 - Commerzbank: Mar26 1.1900, Dec26 1.2200
The desk’s outlook aligns closely with the market consensus, landing towards the upper spectrum of forecasts. Given the present trading value of 1.1419, the market currently leans towards a more cautious approach which is reflected in our analysis and the broader consensus, reinforcing the notion of holding patterns from both the Fed and market participants.
How other firms see it
Aligning with this cautious outlook are firms such as Goldman and BofA, indicating their respective targets for EUR/USD as indicative of a hawkish yet measured stance from the Fed. On the contrary, firms like Commerzbank hold a more aggressive position, hinting at a potential for stronger currency movements based on rate adjustments. In particular, the interplay between expectations for the Fed and the anticipated ECB response emphasizes broader market dynamics.
With implications for USD/JPY also looming, the recent Fed commentary alongside the BoJ's own policy adjustments creates a complex narrative as both central banks navigate their inflationary environments.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed likely to maintain policy at July meeting, countering prior rate hike expectations.
- 02Recent economic indicators show inflation at 0.1% vs. expected 0.4%, with labor data disappointing.
- 03Market consensus for EUR/USD at 1.16 supports a cautious Fed stance, with internal forecasts aligned.
- 04Divergence in firm opinions reflects uncertainty in future rate movements across the USD and JPY.
Market implications
Traders should monitor the EUR/USD around the 1.16 target, with the Fed's stance influencing broader currency movements. Any shifts in market sentiment ahead of the FOMC meeting could lead to volatility, especially if inflation data trends unexpectedly change.
Risks to this view
A stronger-than-expected July inflation print or robust job growth could lead policymakers to reconsider rate hikes sooner than anticipated, reversing the current outlook and potentially driving EUR/USD lower. Additionally, geopolitical developments affecting oil prices could further complicate the Fed's decision-making framework.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Citi | Bearish | 1.1000 |
UOB | Neutral | 1.1450 |
MUFG | Bullish | 1.1800 |
Articles FOMC preview: Fed to stay on hold after June’s hawkish shift Published 09:41 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download While the recent surge in oil prices has led markets to increase their expectations of a Federal Reserve rate hike, June’s inflation data came in well below forecasts, and labour market figures were softer than anticipated. As a result, we expect the Fed to leave policy unchanged at its 28-29 July meeting James Knightley and Chris Turner Lower-than-expected June inflation prints and softer jobs numbers than hoped point towards the Federal Reserve leaving policy unchanged next week Cooler inflation to keep the hawks at bay The June Federal Open Market Committee (FOMC) meeting dispelled any fears about a potential politicisation of the Federal Reserve via the appointment of Kevin Warsh as its new Chair. The FOMC statement, and Warsh’s own commentary, emphasised a commitment to delivering price stability.
The summary of economic projections, meanwhile, showed the FOMC split right down the middle on whether to raise interest rates this year. Markets swiftly moved from pricing an 80% probability of a 25bp hike later this year to fully discounting one-and-a-half 25bp hikes. The softer‑than‑anticipated June CPI, the benign PPI readings, and the Fed’s own Beige Book – marked by a notably muted tone on pricing – collectively suggest that the urgency for action might not have been as strong as initially assumed.
Moreover, the June jobs report showed non-farm payrolls rising just 57,000 after the previous three months saw an average increase of 164,000. As such, we expect the Fed to leave monetary policy unchanged on Wednesday. While nine FOMC participants projected a rate hike by December, we suspect that most of them will be non‑voters this year, given the tone and content of officials’ remarks.
Policy direction down to oil There is justifiable concern that the re-escalation of the Middle East conflict and the rebound in oil prices will keep inflation higher for longer. The spike in oil prices was responsible for a 20bp jump in expectations of cumulative Fed rate hikes by the first quarter of 2027 over the past seven days. Our counterpoint, though, is that gasoline prices didn’t fall in line with oil price declines, as the chart below shows.
Admittedly, we saw the oil price fall below $70/bbl for only a brief period. But ordinarily, this would be consistent with gasoline prices dropping $3.50/gallon. Prices got nowhere near that.
WTI oil price versus US retail gasoline prices Source: Macrobond, ING "> Source: Macrobond, ING Instead, the current oil price is historically consistent with gasoline prices of just above $4/gallon, which is where we currently stand. With natural gas prices remaining little changed in the US given ample domestic supply, the energy situation doesn’t guarantee that we’ll see inflation push higher again. A de-escalation of the conflict and a resumption of flows would likely mean oil prices drop sharply and rate hike expectations start to unwind.
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