TD Securities has forecasted that the US dollar will weaken if the Federal Reserve keeps interest rates unchanged this week. According to strategist Howard Du at the firm, the extent of any dollar decline will hinge on whether Fed policymakers unanimously back Chair Kevin Warsh's stance.

Du believes the market is incorrectly pricing in the risk of a rate hike. "If the Fed decides to hold rates steady and dissenting votes do not exceed two, the dollar should experience a short-term drop as event risk premiums fade," he stated.

Expectations for a Fed rate increase, combined with safe-haven demand from the Middle East conflict, have driven the US dollar index up nearly 3% since late February. Data from the Commodity Futures Trading Commission (CFTC) shows speculative forex traders, including asset managers and non-commercial players, have recently boosted their long dollar positions, reaching the highest level of bullish sentiment since 2015.

Regarding this, Du noted, "Current long dollar positioning already incorporates some risk premium for a potentially hawkish outcome at the July meeting." He added that if the July rate decision passes without any dissenting votes, "it would surprise the market and indicate that Warsh may have successfully built a degree of consensus, which should lead to a relatively sharper short-term selloff in the dollar."

TD Securities predicts a 0.5% decline in the dollar index if Fed policymakers present a united front at this meeting. Despite "hawkish momentum building," the firm's strategists anticipate two dissenting votes at Wednesday's Fed meeting, from Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan. Under this scenario, they forecast a 0.3% drop in the dollar index.

"Geopolitical tensions in the Middle East are pushing oil prices higher, increasing inflation risks and strengthening the case for a rate hike," strategists wrote in a note. "But we believe more evidence is needed to win over a majority of policymakers."

Warsh is set to announce his second rate decision since taking office at 2:00 AM Beijing time on Thursday. Global capital markets are watching closely, as just one month ago, markets were nearly certain the Fed would hold rates steady in July. Now, the CME FedWatch Tool shows the probability of a 25-basis-point rate hike this week has surged to over 30%, up from 13% a week ago.

The cooling of June US CPI data initially convinced markets the Fed could remain on hold. However, renewed Middle East tensions have pushed oil prices higher, with Brent crude gaining 25% since the June Fed meeting. Rising oil costs have quickly translated to higher gasoline and diesel prices, pressuring both consumers and US industry.

Adding to the mix, on July 24, the Trump administration announced new tariffs of 10% to 12.5% on 60 countries, as a replacement plan after the Supreme Court struck down the previous "Liberation Day" tariffs. Meanwhile, robust investment in artificial intelligence (AI) continues to drive demand growth. These three factors have reversed the market's view on cooling inflation.

Citigroup has described this as "the most divided moment since September 2024." Data shows open interest in fed funds futures contracts surged to a record 967,136 on Monday, up from 909,714 last Friday. Typically, by this stage before a meeting, market expectations for the policy outcome are highly aligned, but this time is different.

The biggest wildcard at this meeting is Warsh himself. Since taking office on May 22, he has completely upended the Fed's communication paradigm by explicitly committing to abandon "forward guidance"—meaning the central bank will no longer signal the rate path in advance. During a July 15 congressional hearing, he refused to offer any specific insights on the interest rate trajectory for the coming months.

The consequences of Warsh's approach are becoming apparent: markets have lost the "policy compass" they relied on for the past decade. Goldman Sachs notes that investors see "unusually high uncertainty" surrounding the July meeting outcome, due to internal Fed divisions and Warsh's own unclear stance.

However, some analysts suggest Warsh himself may not support a rate hike now. In his July 15 congressional testimony, he described the energy price shock as "a specific shock to specific prices that we cannot control." Additionally, the June CPI posted its first decline in six years, and job growth has slowed, providing reasons to hold steady.

A survey of 76 economists shows all respondents expect the Fed to maintain rates unchanged. For Warsh, the test lies in balancing his congressional pledge of "zero tolerance" for inflation against his reluctance to outline a specific path. As BlackRock previously noted, Warsh "recognizes that credibility remains the central bank's most powerful policy tool, but those words ultimately need to be backed by action."