The dollar index entered a high-level consolidation after refreshing a three-week high to 101.54 on Thursday, currently trading near 101.35 during Friday's European session. Market pricing for the Federal Reserve's upcoming meeting remains divided, with holding rates steady still the base case, though a rate hike option has not been fully ruled out.
According to the CME FedWatch Tool, the probability of the Fed maintaining rates unchanged in July stands at 65.3%, while the probability of a 25-basis-point hike is 34.7%. The probability of holding steady through September is 17.6%, with a 57% chance of a 25-basis-point hike and a 25.4% chance of a 50-basis-point hike.
In their latest FOMC preview report, Natixis economists Christopher Hodge and Selin Aker noted that recent data has provided the Fed with some "breathing room." They expect the Fed to keep rates unchanged at next week's meeting and predict this "extended pause" could last until 2026.
Data Provides 'Breathing Room' for the Fed
Natixis points out that incremental data since the June FOMC meeting, while "limited," has been "broadly dovish," providing data support for the Fed to hold rates steady.
Labor Market: The June employment report was "mixed but softer than previous." Nonfarm payrolls grew by only 57,000, well below the average increase of 164,000 over the prior three months. More notably, there was a structural shift in labor force participation declines. Previous declines were driven by older Americans exiting the workforce, boosted by surging asset prices, but June's decline was concentrated among prime-age workers (25-54). Natixis warns that if this trend continues, it would signal "frustration among the largest segment of the US workforce in finding employment," posing concerns for the consumer outlook. Inflation Data: The June headline CPI fell 0.4% month-over-month, mainly due to a sharp drop in energy prices following the temporary US-Iran ceasefire. However, the core CPI, which holds more policy relevance, was flat month-over-month, indicating the disinflation process is still underway. Natixis estimates that components from CPI and PPI mapped to the Fed's preferred inflation gauge, the PCE deflator, suggest the June PCE reading may fall below the Fed's 2% target.
This combination—a softer labor market and cooling inflation—provides ample data support for the Fed's "extended pause." Natixis emphasizes that while the June inflation data was "unusual in magnitude" (well below consensus), its "signal is not unusual"—the disinflation process is still progressing toward the 2% target.
Powell's Stance Is Particularly Crucial
Despite the dovish data, public communications from Fed officials present a "hawkish-dovish mix, leaning overall hawkish" pattern.
Hawkish Camp: Waller, Logan, Hammack, and Kashkari have all expressed ongoing concerns about inflation. Dallas Fed President Lorie Logan is currently the only FOMC voter publicly advocating for a rate hike. Natixis expects she will dissent at next week's meeting, potentially joined by Cleveland Fed President Beth Hammack and Minneapolis Fed President Neel Kashkari. Dovish Camp: New York Fed President John Williams is the "clear dove," stating that "the current policy stance is well-positioned" and there are "encouraging reasons to expect that inflation has peaked and will recede over the next few quarters."
The most significant voice—Fed Chair Jerome Powell: In his congressional testimony last week, Powell stated the Fed would not tolerate "persistently high inflation" but simultaneously described AI investment as a "one-time price pressure." Natixis interprets this as "at least some willingness to 'look through' near-term inflation effects and expect them to prove transitory"—the clearest dovish signal from Powell since he took office.
Natixis concludes that while hawkish members continue to lean toward a hike, the "more influential voices" on the committee appear inclined to wait—the softer June inflation data has reduced the urgency for near-term policy rate adjustments.
July Pause, Extended Pause Through 2026
Based on the assessment of data and communication, Natixis's base case is:
July Meeting: Hold rates unchanged—despite a potential dissent from Logan, possibly joined by Hammack and Kashkari, the committee majority will support holding steady; Policy Statement: "Largely unchanged"—broadly consistent with the simplified statement from the June meeting; "Extended Pause" Through 2026: Natixis believes the Fed will maintain rates unchanged for the foreseeable future.
Natixis's core judgment is based on the following logic:
Inflation Outlook: "Cautiously optimistic"—key inflation drivers in recent years, such as rapid wage growth and housing inflation, are expected to cool in coming quarters; Labor Market: Stable but not inflationary—the labor market, while stable, will not provide additional inflationary impetus; Disinflation Process: Though bumpy, the direction is clear—Natixis interprets the June inflation data as having a "clear signal," i.e., progress toward the 2% target continues.
Natixis argues the Fed needs "to wait for clearer evidence that inflation pressures are driven by cyclical rather than exogenous factors," and since Natixis does not expect inflation to reaccelerate, an "extended pause" is a reasonable base case.
Iran Situation and Tariffs Are the Biggest Wildcards for Inflation Outlook
Natixis acknowledges two "major upside risks" to its inflation outlook:
Risk One: Escalation of the Iran Situation. Following the collapse of the temporary US-Iran peace agreement, Brent crude has broken through $100/barrel. If the Middle East conflict escalates further, energy prices could continue to rise, pushing up headline inflation and potentially transmitting to core inflation, forcing the Fed to reconsider a rate hike. Risk Two: New Tariffs. The Trump administration plans to impose 10%-12.5% new tariffs on 60 major trading partners. Tariffs would directly push up the prices of imported goods and could transmit to broader price levels through supply chains, creating upward pressure on inflation.
Natixis notes that if inflation data surprises to the upside or remains persistently high, Fed Chair Powell "may need to raise rates to maintain his own credibility." This places Powell in a delicate balancing position—he must fight inflation while avoiding excessive tightening that could unnecessarily harm economic growth and the labor market.
Alternative Scenario—If Consumption Slows, Odds of Rate Cuts Rise
Natixis also presents an alternative scenario: if the pace of consumption slowdown exceeds expectations, the Fed's next move could be a rate cut rather than a hike.
Natixis's base forecast is for a gradual slowdown in consumption. If this assessment is correct, "the Fed can avoid rate hikes in the near term." If the consumption slowdown exceeds expectations, the possibility of rate cuts would increase—but Natixis warns this scenario "is unlikely to materialize before next year."
This assessment provides a crucial medium-term perspective: the market is currently highly focused on "when the Fed will hike rates," but Natixis's analysis suggests that if economic data softens further, market narratives could shift from "hikes" to "cuts" by 2027—though that inflection point has not yet arrived.
Summary: Natixis's 'Extended Pause' Judgment Faces Dual Tests from Iran and Tariffs
Natixis's outlook on Fed policy can be summarized as: the base case is an "extended pause"—holding steady in July and continuing through 2026—but the Iran situation and new tariffs constitute significant upside risks.
Natixis's core logic is built on a "cautiously optimistic" view of inflation, believing the disinflation process, though bumpy, is on a clear path, and the labor market, while stable, is not inflationary. This gives the Fed room to keep rates unchanged while waiting for clearer evidence that inflation pressures are driven by cyclical rather than exogenous factors.
However, Natixis acknowledges that this judgment faces two "major upside risks"—an escalation of Middle East tensions driving up energy prices, and new tariffs raising import costs. If either risk materializes, Fed Chair Powell "may need to raise rates to maintain his credibility."
For the market, this means that while the Fed's "extended pause" narrative is the base case, its credibility is being continuously tested by geopolitical and trade policy uncertainties.
The real focus of the July FOMC meeting is not on the rate decision itself (a hold is almost certain), but on how Powell balances the tension between "improving data" and "upside risks"—and how this balance will influence market pricing for the policy path in September and beyond.
As of 15:39 Beijing time on July 24, the dollar index stood at 101.31.
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