The comments from the ECB's Isabel Schnabel yesterday rippled through interest rate markets around the world. Traders were naturally reassessing that if the next move in ECB rates is up, why is the market pricing in a further 90bp of Fed easing? Those thoughts prompted a 4-5 tick sell-off in Fed Funds futures contracts for late 2026 and the Fed terminal rate for next year has now been re-priced 20bp higher to 3.13% over the last two weeks, ING's FX analyst Chris Turner notes.

Dollar faces limited downside ahead of FOMC

"The move higher in US rates also weighed on US growth stocks as discounted cash flows were repriced lower. One quick word of caution here. We think Schnabel's remarks were largely sent out as a counterweight to the four to five vocal ECB doves pushing for another rate cut. In other words, she might not privately be as hawkish as her comments suggest."

"Even though short-term euro rates led the global short-end higher yesterday, the news actually weighed on EUR/USD. Here, the reassessment of the Fed easing cycle proved the bigger story. There are now high expectations of a 'hawkish cut' at Wednesday evening's FOMC decision. We had felt that the short-end of the dollar's upside was vulnerable to this FOMC event risk."

"With the FOMC meeting looming, we suspect today's data may not be enough to weigh heavily on the dollar. The focus here will be on US JOLTS data, which we haven't seen since August. These are expected to slow, as will the quits rate and the vacancies to unemployed ratio. We will also see the weekly ADP jobs release data and the NFIB small business optimism survey. The latter could surprise positively. With market pricing of further Fed easing still vulnerable, we suspect the dollar's downside is limited into the Fed meeting. And DXY could have a run up to 99.30 if there are any upside surprises in today's data."