A week that began with optimism over falling oil prices ended with markets fixated on the prospect of renewed Federal Reserve tightening. The peace dividend from the US-Iran agreement continued to push energy prices lower and helped support risk sentiment. But the bigger story was the Fed’s abrupt shift toward a more hawkish outlook, which triggered a broad repricing across currencies, rates and equities.
The Fed’s updated projections fundamentally altered market expectations. Policymakers now see interest rates ending the year above current levels, effectively signaling one additional hike as the baseline. More importantly, the distribution of projections revealed that a sizable minority of officials already favor two or more hikes. Investors quickly adjusted, pushing the probability of a September increase sharply higher and reviving discussions about whether the tightening cycle is truly over.
The consequences were visible across asset classes. Dollar strengthened broadly and now approaches a major long-term technical barrier that could determine its direction for the rest of the year. Treasury markets priced in higher short-term rates, while equity performance diverged. Dow Jones Industrial Average surged to fresh records as falling oil prices boosted traditional sectors, but NASDAQ and S&P 500 remained trapped in consolidation as technology stocks grappled with the prospect of tighter monetary policy. For the week, Dollar led all major currencies, while Kiwi and Sterling lagged as investors reassessed their respective central bank outlooks.
Fed Moves From Higher-for-Longer to Higher-Again
The defining market event of the week was not the Fed’s decision to hold rates steady. It was the realization that the central bank is no longer merely arguing for higher-for-longer policy. Instead, it is increasingly preparing markets for the possibility of higher-again. Under Kevin Warsh’s first meeting as Chair, the Federal Reserve delivered one of the most hawkish projection updates since the inflation shock began earlier this year.
The catalyst was a significant reassessment of inflation risks. Policymakers raised their 2026 core PCE inflation forecast to 3.6% from 2.7% previously, acknowledging that the energy shock triggered by the Middle East conflict would leave a more lasting imprint on prices than previously assumed. While growth projections were revised only modestly, inflation forecasts were pushed higher throughout the projection horizon, signaling growing concern that price pressures may prove more persistent than anticipated.
The headline takeaway was that the median federal funds rate projection now stands at 3.8% by year-end, implying one additional rate hike. Yet the more revealing story lies beneath the median. Nine officials now expect at least one increase this year, while six policymakers already see two or more hikes as appropriate. One official even projected three hikes. Meanwhile, Warsh refused to provide his dots. That distribution matters because it would take only a modest shift in the coming months for the median outlook to move from one hike to two, particularly if core CPI and PCE inflation remain elevated through the summer.
Markets have responded by aggressively repricing the path of US rates. Futures markets now see September as the most likely timing for the next move (74% chance), while expectations for a second hike have increased sharply. By December, investors assign nearly a 90% probability that rates are at least 25 basis points higher than today and more than a 55% probability of two hikes. The debate has shifted dramatically. Only a week ago, investors were still questioning whether the Fed would tighten again. Today, the question is whether one hike will be enough.
Two-Year Yield Says the Fed Isn’t Done Yet
If the clearest message from the Federal Reserve came through the dot plot, the clearest confirmation came from the Treasury market. Investors wasted little time adjusting to the Fed’s more hawkish outlook, driving two-year Treasury yields to their highest levels since February 2025. The move reflected a complete reversal of expectations that had dominated markets only months ago, when investors were still debating how many rate cuts might be delivered this year.
What makes the move particularly noteworthy is that it was concentrated at the front end of the curve. While two-year yields surged, the benchmark 10-year yield ended the week little changed around 4.45%. That divergence suggests markets are not pricing a loss of inflation control. Rather, investors are pricing a Federal Reserve that will keep rates elevated for longer and potentially raise them again if inflation remains stubborn. The message is straightforward: tighter policy, not runaway inflation.
The two-year yield is often viewed as the purest market expression of Fed expectations over the next several quarters. Its rise reflects the reality that traders have had to completely abandon hopes for near-term easing and aggressively price the possibility of multiple hikes. The shift mirrors developments in futures markets, where September has become the favored timing for the next move and the probability of two hikes by year-end has risen sharply.
Technically, near term outlook in 2-year yield outlook remains firmly bullish as long as 4.016 support holds. The next target comes at 100% projection of 3.365 to 4.027 from 3.679 at 4.341. There are two aspects to monitor closely. First is whether the current rally accelerates as yields approach fresh highs. Second is the market’s reaction at the 4.341 projection target. Strong momentum into and through that level would indicate growing confidence that the Fed may ultimately need to tighten more aggressively than currently projected.
The bigger picture may be even more important. The corrective pattern from 5.259 (2023 high) may have already completed as a triangle at 3.365. The catalyst for the reversal was arguably the March oil shock triggered by the US-Iran conflict, which forced investors to reassess the inflation outlook and ultimately set the stage for the Fed’s hawkish pivot.
Structurally, the key level to watch is 4.424, the January 2025 high. If that resistance caps the current rally, the market would effectively be signaling that the Fed is merely reversing the rate cuts delivered during 2025. In that scenario, the repricing remains a contained cyclical adjustment, with the longer-term terminal rate still anchored around the 3.75%-4.00% area.
However, a decisive break above 4.424 would carry much larger implications. It would suggest investors are no longer simply pricing the reversal of last year’s easing cycle, but are beginning to question whether the entire policy-loosening phase since mid-2024 was a mistake. Such a move would mark a shift from a temporary inflation shock to a full-fledged macro regime change, where structurally higher inflation forces the Fed to maintain materially tighter policy for years rather than quarters. That is the line separating a hawkish adjustment from a genuine higher-rate era.
Dollar’s Biggest Test Since 2025 Has Arrived
Dollar Index surged sharply following the Fed meeting and reached 101.12 before settling back slightly into the weekly close. The rally carried the index almost exactly to 38.2% retracement of 110.17 to 95.55 at 101.13. This is no ordinary resistance. It is a level that could determine whether the Dollar’s recovery develops into a broader medium-term uptrend.
Technically, the near-term picture remains bullish as long as 99.38 support holds. Firm break above 101.13 would confirm bullish continuation and target 100% projection of 95.55 to 100.64 from 97.62 at 102.71 next.
More importantly, it would strengthen the case that the rise from 95.55 is reversing the broader down trend from 110.17 (2025 high). That would set up further rise to 61.8% retracement at 104.58, or even further to long term falling channel ceiling (now at around 107).
Dollar Faces Tug-of-War Between Fed and Risk Appetite
A traditional headwind for the Dollar would be the return of strong risk appetite following the collapse in oil prices and the gradual normalization of shipping through the Strait of Hormuz. Historically, falling energy prices, improving global trade conditions and rising equity markets tend to encourage investors to move away from safe-haven assets and into higher-yielding or growth-sensitive currencies.
This cycle, however, may be more complicated. A strong stock market is not necessarily bearish for the Dollar if it reflects improving earnings prospects and stronger economic growth. Lower energy costs effectively boost household purchasing power and corporate profitability. As supply chains normalize and transportation costs fall, businesses gain confidence to invest while consumers increase spending. A stock market reaching record highs under such conditions could reinforce rather than weaken the underlying strength of the US economy.
That creates an unusual policy dilemma for the Federal Reserve. If geopolitical relief accelerates an economy that is already expanding at a solid pace, the output gap could narrow further and labor-market pressures could intensify. At that point, the Fed’s challenge would no longer be balancing growth against inflation. Instead, the focus would shift toward preventing stronger demand from triggering a second wave of core inflation, particularly in the services sector. Such an outcome would strengthen the case for additional tightening and provide ongoing support for the Dollar.
For now, the greenback appears caught in a tug-of-war between improving risk sentiment and rising Fed expectations. The deciding factor over the coming months is likely to be domestic services inflation. If falling oil prices pull headline inflation lower but services inflation remains stubbornly elevated, markets may conclude that the Fed needs to stay hawkish despite the improving geopolitical backdrop. In that scenario, the Dollar could continue to strengthen even as global risk assets perform well.
Technically, DOW’s up trend resumed last week and hit a near record high. While some consolidations might be seen in the near term, outlook will stay bullish as long as 49,940 support holds. Next target is 61.8% projection of 36,611 to 50,512 from 45,057 at 53,648.
While NASDAQ did rebound last week, upside is capped well below 27,190 record high. Near term outlook remains neutral for more consolidations first. Though, in case of another fall, downside should be contained by 38.2% retracement of 20,690 to 27,190 at 24,707. Break of 27,190 to resume the larger up trend is still expected, but later.
EUR/USD Weekly Outlook
Immediate focus is now on 1.1408 support in EUR/USD after last week’s decline. Firm break there will resume whole fall from 1.2081 and target 100% projection of 1.2081 to 1.1408 from 1.1848 at 1.1175. On the upside, above 1.1499 support turned resistance will turn intraday bias neutral again first. However, outlook will remain mildly bearish as long as 1.1621 resistance holds, in case of recovery.
In the bigger picture, focus is back on 38.2% retracement of 1.0176 to 1.2081 at 1.1353. Decisive break there will revive the case of medium term bearish trend reversal after rejection by 1.2 key cluster resistance level. Further fall should be seen to 61.8% retracement at 1.0904. Nevertheless, strong rebound from 1.1353, followed by break of 1.1621 resistance, will retain medium term bullishness.
In the long term picture, 38.2% retracement of 1.6039 to 0.9534 at 1.2019, which is close to 1.2000 psychological level is the key for the outlook. Rejection by this level will keep the multi decade down trend from 1.6039 (2008 high) intact, and keep outlook neutral at best. However, decisive break of 1.2000/19, will suggest long term bullish trend reversal, and target 61.8% retracement at 1.3554.
