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ING's James Knightley highlights that market expectations for Federal Reserve rate cuts in 2026 have diminished due to higher-than-anticipated US inflation and robust economic growth. Recent data showing persistent inflationary pressures and strong GDP expansion have reduced the likelihood of early monetary easing, prompting investors to reassess their positioning in USD-related assets. This shift in expectations could lead to a more resilient USD in the near term, as tighter policy conditions and inflationary risks weigh on market sentiment. For forex traders, the reduced probability of Fed rate cuts introduces volatility in USD pairs, particularly EUR/USD and USD/JPY. A stronger USD outlook may attract carry trade unwinding and increased demand for dollar assets. Additionally, the Fed's delayed easing could impact global capital flows, with emerging markets facing potential outflows if the dollar remains strong. Traders should monitor upcoming inflation data and Fed officials' comments for further clues on policy direction. The implications for global markets are significant, as prolonged high inflation could delay rate cuts beyond 2026, extending the USD's dominance. Investors should watch the June CPI report and the Fed's June meeting for critical signals. For Gulf investors, a stronger USD may affect local currency valuations and commodity-linked assets, requiring hedging strategies to mitigate currency risk.
