The US Dollar (USD) is broadly, albeit modestly, stronger after last night's FOMC statement and press conference. The statement was largely as expected, but the press conference turned into a kind of 'rate protest' from the Federal Reserve. Here, Fed Chair Jerome Powell seemed to be working off a new script and emphasising that a December rate cut was not a 'foregone conclusion'. That saw pricing of a 25bp December rate cut drop to 70% from around 100% prior, ING's FX analyst Chris Turner notes.

Fed communication makes it harder to sell the USD

"The Fed would now argue that a 70% probability is still too high. Learning that the policy rate was not on a glide path to the 3.00/3.25% area saw investors pay up the short-end of the US rate curve and take about 10bp out of the expected easing cycle. A bearish flattening of the curve was most felt against the low-yielding currencies of the Swiss franc and the yen, while commodity FX was a little more insulated on the back of improving trade relations between the US and China. The one-year delay in Chinese export controls on rare earths seems a big win for global supply chains."

"Interestingly, US equities have stayed relatively well bid, suggesting that the AI corporate earnings story, rather than Fed easing, is the main driver of this year's narrow but impressive gains in the S&P 500. Overnight, Meta, Alphabet and MSFT produced a mixed set of results – although top-line revenue did seem to deliver. Going back to the Fed, it does seem a December rate cut is in the balance now. The central bank sounds more relaxed on inflation, but equally, the jobless claims data from the state level is telling the Fed that the employment situation is not deteriorating any further. And with consumption and business investment performing well, it now seems that there's a healthy internal debate on whether the neutral policy rate is closer to 4.00% than 3.00%. Powell characterised this as strongly differing views over the future path of the policy rate."

"Last night's Fed communication makes it harder to sell the dollar now. We will really need to see some soft US jobs data to firm up views of another 75bp of easing from the central bank into next summer. Otherwise, 25bp could easily be priced out of that cycle. Beyond the weekly jobless claims data today, the ongoing shutdown means the US data calendar is quiet. Expect the dollar to remain bid, especially versus the yen, where the Bank of Japan seems in no hurry to tighten policy – seemingly needing more data on wage negotiations and food inflation before hiking again. 155 is the risk here. DXY looks as though it could hang around in the top half of the 98-100 trading range for a while."