Fed Day: Markets Brace for Rate Cuts and Dollar Swings.
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Fed decision: A 25bp cut is expected, but guidance and Dot Plots will dictate market reaction.
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Dots vs market: Fed projects fewer cuts than markets are pricing, raising risk of repricing at the short end.
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Powell’s tone: Expected to be cautious—acknowledging easing but avoiding urgency. Too dovish could push DXY toward 95.
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Euro breakout: EUR/USD has broken higher, with 1.20 in sight as seasonality and rate spreads support the move.
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Sterling risk: Fiscal concerns resurface ahead of the UK budget, keeping EUR/GBP range-bound despite a hawkish BoE.
USD: All eyes on Powell and the Dot Plots
The Fed is widely expected to trim rates by 25bp today, but the details matter more than the move itself. At 20:00 CET, the FOMC will release its statement alongside the updated Summary of Economic Projections (SEP), including the Dot Plots that map out the Fed Funds rate outlook through 2027. Traders will be looking for clues in the language: wording like “considering additional adjustments” would suggest a sequence of cuts, while “considering the extent and timing” would hint at caution, pushing short-term yields and the dollar higher.
Voting patterns could also draw attention—possibly eight in favour of 25bp, three for 50bp (Waller, Bowman, Miran), and one dissent preferring no change (Schmid).
Most economists expect the 2025 Dot Plot to stick with two cuts, leaving year-end rates around 3.75–4.00% (versus 4.25–4.50% now). Markets, however, are pricing in nearly 70bp of cuts. Looking ahead, 2026 could add another cut (3.25–3.50%) and 2027 may ease further to 3.00–3.25%. The slower path versus market pricing suggests friction for the front end of the curve.
At 20:30 CET, Powell’s press conference will take center stage. Markets are hoping he plays down tariff-driven inflation and voices stronger concern about the jobs market. He’ll likely admit policy is gradually becoming less restrictive, but avoid signalling aggressive cuts.
The dollar enters the meeting weak, with risk tilted to the upside if the Dot Plots or Powell sound firmer. Still, the broader message should confirm the Fed is embarking on a 125bp easing cycle. Any dollar spikes may be short-lived, with DXY sellers lurking near 97.50/98.00. A sharp dovish pivot—if Powell focuses solely on job protection—could see DXY fall toward 95.
EUR: Momentum building
EUR/USD has finally broken out of a 10-week range and momentum looks bullish. Swap rate spreads have tightened around 50bp in the euro’s favour over that period. Tonight’s FOMC will be the key driver, but buyers are likely to emerge on dips toward 1.1750–1.1780 during Powell’s remarks.
Seasonality also works against the dollar in November–December, with 1.1910 the last hurdle before 1.20.
Meanwhile, the ECB publishes its wage tracker today. The last report showed wage deals cooling to 1.7% YoY in Q1 2026 (from 4.6% a year earlier). If it has picked up toward 2.0%, that would support the ECB’s stance that the easing cycle is done. Markets currently price just 11bp of cuts by next summer.
GBP: Fiscal strain weighs on sterling
Sterling’s recent rally faltered after the FT reported that the Office for Budget Responsibility has lowered UK productivity forecasts, potentially widening the fiscal gap by £9bn ahead of November’s budget. This raises pressure on Chancellor Rachel Reeves and highlights fiscal risk as sterling’s weak spot.
The pound also slipped after August services CPI came in a touch softer at 4.7%, though the BoE’s preferred core services measure held steady at 4.2% YoY.
In the short term, dollar moves dominate GBP/USD, which should find a floor near 1.3600 before testing above 1.37. Fiscal risk is more likely to play out in EUR/GBP, though with the BoE still leaning hawkish, the pair may remain capped in a 0.8650–0.8715 range.