While the US dollar has eased slightly against the euro and the pound — a move that looks more like a correction than a fundamental problem for the dollar — an interesting report from Citadel Securities caught my eye and reads like a direct warning to markets: the next serious risk for traders is a tightening of financial conditions, and the Fed's next step is most likely to be a rate increase.

The firm lists three factors that make this scenario increasingly probable: a large investment cycle in AI, a tightening of conditions in energy markets, and a strengthening labor market. All three are present at the same time and reinforce one another.

On the labor market, the central point of Fed attention, low unemployment and constrained labor supply mean any further acceleration risks pushing wages above levels compatible with 2% inflation. The May employment report — +172,000 jobs versus a forecast of 85,000 — confirmed that this risk is not hypothetical. Markets are already pricing a 25-basis-point hike by December, and the chance of an earlier move in September is growing.

A separate thesis worth attention concerns inflation even after a possible reopening of the Strait of Hormuz. The firm warns that even if the conflict with Iran is resolved, price pressure will not automatically disappear. Inventories depleted during the blockade will need replenishing. Governments and companies, scarred by the energy crisis, will build larger strategic reserves and diversify supply chains—a structural rise in costs across the economy for many months to come. In other words, reopening the strait will reduce the geopolitical premium in oil but will not eliminate inflationary pressure entirely.

A final risk that is receiving little attention so far is political pushback against AI. Ahead of the November midterm elections, concerns about job losses, energy consumption, and inflation are attracting growing political attention.

For the dollar, the picture is unequivocally positive. Fed rate hikes in the context of a resilient economy and persistent inflation make US assets more attractive to global investors—the yield gap between the United States and other major economies will widen. If the ECB pauses after a June increase while the Fed continues to tighten, monetary divergence will favor the dollar against the euro and other developed market currencies. For emerging markets, a stronger dollar and higher US rates mean capital outflows and pressure on local currencies — a pattern that is already observable.

Technical outlook for EUR/USD

Buyers of EUR/USD should consider taking 1.1550. That will allow a test of 1.1580, and from there the pair could reach 1.1600, although advancing beyond that level without support from major participants would be difficult. The farther target is the high near 1.1625. On the downside, only substantive buying interest around 1.1530 would prompt large players to act; absent that, it would be prudent to wait for a new low at 1.1505 or to consider long entries from 1.1480.

Technical outlook for GBP/USD

For GBP/USD, sterling buyers must clear the nearest resistance at 1.3370 to target 1.3405; moving above that level may prove difficult, with a further target at 1.3440. If the pair falls, bears will seek to seize control at 1.3335. A decisive break below 1.3335 would likely inflict significant damage on long positions and could push GBP/USD toward 1.3300, with downside risk extending to 1.3285.