From Dovish Spark to Hawkish Snapback.

• Fed meeting caused sharp swings: dovish Dot Plot vs. Powell’s hawkish press conference.

• Dollar reversed losses, with DXY ending +0.5%, though longer-term bias remains negative.

• Powell avoided labeling inflation “transitory” and framed cuts as risk management.

• EUR/USD likely to rebound toward 1.185; 1.20 remains the Q4 target.

• BoE expected to hold rates; QT guidance will drive gilt and GBP reaction.

USD: Whipsawed by the Fed
Yesterday’s Fed meeting was a rollercoaster. Markets first saw a dovish signal: aside from Miran’s 50bp dissent, the Dot Plot shifted to show two additional cuts this year. That drove front-end yields lower and pushed the dollar down. But the move reversed almost instantly once Powell began speaking. Two-year swap rates climbed above pre-meeting levels, the yield curve steepened, and the DXY closed 0.5% higher – extending gains into this morning.

Much of the reversal looked like “sell-the-fact” positioning, with half the initial dollar drop unwound before Powell even took the stage. Still, his refusal to brand inflation pressures as merely “transitory,” combined with framing the cut as a “risk-management” step, diluted the dovish tone. Importantly, Powell also pushed back on the idea that the Fed has lost independence.

Despite the chaos, we still see this as bearish for the dollar. The Fed has clearly shifted into an easing cycle, with the employment side of the mandate now front and center. We expect two further 25bp cuts this year, and the cheaper dollar funding environment should fuel depreciation into year-end – a period already seasonally soft for the greenback. Short-term, we look for some re-softening in the dollar, with jobless claims, the Leading Index, and TIC flows the near-term focal points.

EUR: Slipping Under 1.180
EUR/USD quickly fell back below 1.180 after briefly touching 1.1920 post-FOMC. Positioning adjustments amplified the move during Powell’s press conference.

Our fair-value model still puts short-term equilibrium at 1.185, meaning a further slide to 1.170 would require materially stronger US data – something we doubt given negative momentum in US job reports. We look for EUR/USD to rebound toward 1.185 in the coming days, maintaining a 1.20 target into Q4.

GBP: Spotlight on QT
The Bank of England is expected to hold rates today after August’s hawkish cut. Markets see no chance of easing now, but November’s call is still uncertain. The real focus will be the vote split and QT guidance.

Forward guidance is unlikely to change, as the BoE has stuck to a “cautious and gradual” message. We expect a 6–3 split (Dhingra, Taylor, Ramsden voting for cuts), which could be seen as modestly dovish but shouldn’t drive major repricing.

QT has the most market-moving potential. We expect the annual gilt reduction target to slow to £75bn, with more emphasis on shorter maturities to relieve long-end pressures. Any unexpected hawkish tilt could spark gilt sell-offs, spilling over into sterling. Our base case remains for EUR/GBP to stay gently supported into November’s BoE and fiscal events.