Dovish “Fedspeak” dents dollar

The dollar was on the front foot for much of yesterday’s session notwithstanding some softer than expected economic data out of the US, including a sharp fall in consumer confidence this month. The euro traded down to a new 2026 to date low of just shy of $1.13, while sterling fell to an intra-day low of $1.32. However both have since recovered ground following ‘dovish’ comments from Fed member Williams  – who said there is no “urgency” to raise interest rates again and that one further rate increase may be enough to return inflation to target in a “timelier” manner  – which sees them trading about half a cent higher at around $1.1350 and $1.3270 respectively this morning. EURGBP is a little softer at the start of play again today at about £0.8555, with the pound benefiting from slightly stronger than expected UK GDP data released a short while ago.

The “dovish” Fed comments – which has led the market to pare back expectations for a Fed rate hike next month to just under 50% (from circa 70%) – contributed to a decline in US 2-year bond yields of around 5bps on the day and saw 10-year yields reverse course to end broadly flat overall (having been more than 5bps higher at one stage). Elsewhere in bond markets, German and UK yields finished largely unchanged, though they are nudging lower this morning as they play ‘catch-up’ with yesterday’s late rally in US bonds. In equity markets, the S&P 500 closed down a touch but off its lows of the day, while the Stoxx Europe 600 ended unchanged.

Fed member Williams says that, “with the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information (which) should provide greater clarity on the underlying trends in the economy – and thereby the appropriate setting of monetary policy.” He adds that, “if the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target.”

UK GDP growth in Q2 was slightly stronger than initially estimated according to revised data released a short while ago. The economy grew by 0.5% q-o-q in the three months to June (revised from 0.4%), having expanded by (an unrevised) 0.6% in the first quarter of the year, with business investment and export growth both revised up. On an annual basis, the economy grew by 1.4%, the strongest pace of expansion since the beginning of 2025.

For the day ahead, PCE inflation (August), ISM manufacturing index (September), ADP employment report (September) and another estimate of Q2 GDP growth are all due in the US; unemployment for August is scheduled in the Euro area; and ‘a flash’ reading for inflation in September is due in Germany. Regarding the August PCE inflation data in the US, both headline and core inflation are expected to be unchanged from July at 3.7% and 3.3% respectively, well above the Fed’s 2% target.