Dollar slightly firmer post Fed meeting
The Fed cut interest rates by 25bps to 3.75%-4% following yesterday’s meeting, as widely expected. However, Fed Chair Powell caused a stir in markets when he said at the post-meeting conference that “a further reduction at the December meeting is not a foregone conclusion, far from it.” Given that another 25bps cut in December had been almost fully priced in by the market, expectations for such a move were immediately lowered with a resulting spike in US government bond yields. The dollar strengthened initially as well, though it has since given back some of its gains. This sees EURUSD trading at around $1.1610 this morning, off its immediate post-meeting lows of about $1.1580, while GBPUSD is hovering around the $1.32 level, up from its lows of circa $1.3140. EURGBP is little changed, trading at £0.88. Today’s ECB meeting shouldn’t contain any surprises, with the central bank set to again keep the deposit rate on hold at 2%.
US government bond yields rose sharply as the market pared back the chances of a Fed rate cut at the December meeting (now around 65%), ending the day around 10bps higher across the curve, while German and UK yields have opened a touch higher this morning. US stocks gave up ground following the Fed meeting, ending flat on the day in the case of the S&P 500 and modestly higher (+0.5%) in the case of the Nasdaq. Earnings reports from some of the Big Tech companies elicited a mixed response in after-hours trading, while Trump’s “amazing” meeting with his Chinese counterpart – which saw the tariff truce between the two sides extended for a year, as well as a reduction in fentanyl-related tariffs on China (to 10% from 20%) – is having little impact on markets this morning.
The 25bps cut in US interest rates at yesterday’s meeting brings the cumulative reduction since September 2024 to 150bps. Regarding the Fed’s next meeting in December, Powell said “in the Committee’s discussions, there were strongly differing views about how to proceed in December (with) a further reduction in the policy rate not a forgone conclusion – far from it.”, adding that “we’re going to be looking at the data that we have and how that affects the outlook and the balance of risks” (and ultimately its decision on interest rates).
The focus today will be on the ECB’s latest interest rate announcement. With the Euro area economy expanding at a modest pace, inflation running close to the 2% target, and the deposit rate in neutral territory, the ECB is set to sit on its hands again and keep policy unchanged. The market also expects the deposit rate to remain on hold at 2% through the end of this year and into 2026, although it continues to price in some chance of one final 25bps cut in the current cycle. Meanwhile, there are a number of Euro area economic data releases scheduled for today, including the October Economic Sentiment Indicator; a ‘flash’ GDP reading for Q3, and the unemployment rate for August.