On Monday, July 27th, the dominant variable in the foreign exchange market shifted rapidly from energy supply shocks to monetary policy uncertainty. The US and Iran suspended their mutual attacks, leaving a window for diplomatic maneuvering, causing international oil prices to fall sharply. The conflict premium previously embedded in the dollar, crude oil, and US Treasury yields contracted simultaneously. The dollar index was last quoted at approximately 101.40, and the yield on the 10-year US Treasury note fell to around 4.63%. This combination is not a traditional one-way risk-on trade, but rather a cross-asset repricing following declining energy inflation expectations. The intraday drop in oil prices reduced the market's urgency for an immediate Fed rate hike, pushing bond yields down and weakening the dollar's interest rate differential support.

Why did falling oil prices simultaneously depress the US dollar and long-term yields?

Following the recent rapid rise in energy prices, traders began to worry about a resurgence of inflation, with the probability of a Fed rate hike in July rising to approximately 36% to 38%. However, as the conflict temporarily subsided and the risk of oil supply disruptions diminished, the marginal impact of energy prices on inflation expectations subsequently declined. The latest interest rate futures show that the probability of a 25 basis point rate hike in July has fallen from approximately 37.4% last Friday to around 31.5%. This change directly affects the two pillars of the dollar's pricing. First, the cooling of short-term interest rate expectations reduces the expected interest rate advantage of holding dollar assets. Second, the 10-year Treasury yield fell from over 4.70% last week to approximately 4.63%, indicating a simultaneous contraction in term premium and inflation compensation. However, the decline in oil prices is insufficient to prove that the inflation risk has been eliminated. The current ceasefire is more of a tactical pause; Iran continues to emphasize its control over the Strait of Hormuz, and a stable framework for resolving shipping safety, the nuclear issue, and regional security arrangements has not yet been established. While mediation activities continue, commercial shipping volumes remain at low levels. As long as cross-strait traffic does not return to normal, the energy market will struggle to fully eliminate supply risk premiums. Therefore, the downward pressure on the dollar from falling oil prices is clearly conditional. Its duration depends on the degree of recovery in shipping, not simply on whether the two sides continue to attack each other for several days.

The Federal Reserve meeting will be the source of volatility for the US dollar index in the next phase.

The Federal Reserve will hold its policy meeting on July 28-29. This meeting will not release economic projections or an interest rate dot plot; the market will have to glean signals from the policy statement, the committee voting results, and Chairman Kevin Warsh's press conference. The official schedule confirms that the July meeting is a non-projection meeting; the next meeting to release economic projections will be in September. The baseline scenario remains maintaining the target range for the federal funds rate, but the probability gap between holding and raising rates is significantly smaller than before. The minutes of the June meeting showed that some members believed there were already reasons to raise rates at that time, indicating that concerns about sticky inflation within the committee were not merely symbolic. Warsh has also recently stated that prices remain too high, while reducing traditional forward guidance and requiring the market to rely more on real-world data to determine the policy path. For traders, the real sensitivity is not the interest rate decision itself, but the risk prioritization in the statement. If the statement downplays the energy shock and emphasizes falling oil prices and stable inflation expectations, the dollar may continue to lose some policy premium. Conversely, if the statement emphasizes inflation spread, tariff transmission, or labor cost pressures, even without a rate hike this time, short-term yields may still rise again. Voting disagreements are equally important. If dissenting votes emerge in favor of a rate hike, the market will likely increase the probability of a tightening of policy in September; if the committee unanimously chooses to maintain interest rates and acknowledges that the energy shock has eased, the current rebound structure of the dollar index may face further testing. Due to the lack of a dot plot, the wording at the press conference may have a greater amplifying effect on intraday volatility than at a typical meeting.

Technical analysis indicates that the US dollar remains stronger than the middle band, but upward momentum is nearing its limit.

The daily chart shows the US Dollar Index around 101.40, with the Bollinger Band middle line at 101.1108, the upper line at 101.6569, and the lower line at 100.5647. The price remains above the middle line, indicating that the corrective structure that started around 100.35 has not been broken, but the 101.54 to 101.66 area constitutes significant and dense resistance. In the MACD indicator, the DIFF is 0.2352, the DEA is 0.2326, and the histogram is only 0.0052. Although the fast and slow lines remain slightly positive, the gap is extremely narrow, meaning that the upward momentum is approaching a critical point. This pattern is closer to a high-level equilibrium than a trend acceleration. Structurally, the area around 101.11 is both the Bollinger Band middle line and an important reference area for the recent rebound slope. If the US dollar index continues to stay above it, the market is still pricing in an inflation and policy tightening premium. If it effectively falls back below the middle band, 100.95 and 100.56 will be key areas to gauge whether this rebound has ended. On the upside, 101.54 and 101.66 need to be observed; only a break above these levels would indicate that the market is re-accepting a higher interest rate path.