The USD has strengthened overnight after the Federal Reserve delivered its first interest rate hike in three years.
As expected, they raised rates by 0.25% to a new target range of 3.75%–4.00% and indicated there might be another hike needed before the end of the year. Markets had been expecting them to forecast another couple of hikes for next year, but their projections showed no changes for 2027 and instead pointed towards rate cuts beginning in 2028. In that sense, the Fed meeting was less hawkish than many had anticipated. However, what seems to have caught traders’ eyes was the vote split, updates to their inflation projections and changes in the accompanying statement.
The consensus was that one or two members would vote to keep rates on hold, but we got a unanimous decision (12-0). Furthermore, in the statement they removed language blaming elevated inflation on temporary factors and replaced it with a firm commitment to deliver price stability, which suggests concern is growing over how entrenched US inflation is becoming and that their priority is to control it. They also upgraded the description of the economy to "expanding at a solid pace” and raised their inflation forecasts with their projections indicating that they’re not expecting inflation to return to their 2% target until 2029, which both further suggest higher interest rates for longer.
Looking ahead, the key drivers to watch for the USD are oil prices and the US economic data. With crude oil prices back above $100/barrel, interest rates going up, and bond yields sky high, further pressure is mounting on Trump to end the war with Iran. Any signs of de-escalation would quickly reduce oil prices which could quickly shift rate expectations. Equally, if US employment and inflation data begin to weaken, then the Fed’s case for further hike rates will likely weaken in order to prevent damaging economic growth. Of course, the opposite is true if things escalate further.
As a result, the GBP/USD fell over 1-cent from yesterday’s high and it trades around a 7-week low. The EUR/USD fell close to a cent from yesterday’s high and also towards a 7-week low (lowest since end of July). The GBP/EUR remains within its familiar range.
Attention will now shift towards this afternoon’s Bank of England interest rate decision (12pm). They’re widely anticipated to keep rates on hold at 3.75% and therefore the focus will be on how the vote was split, the meeting minutes and any forward guidance on inflation.