The US Dollar (USD) is running into today’s Fed decision slightly firmer but off its best levels as the DXY remains capped around the 99 level, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD firmer as markets juggle various factors ahead of FOMC

"The AUD is outperforming among the core majors following the release of stronger than expected Q3 CPI data which has dampened expectations of near-term RBA rate cuts. The GBP is underperforming on soft sentiment ahead of the November budget and further losses on the crosses. President Trump’s travels across Asia have apparently yielded a trade deal with South Korea (no details as yet) and lifted hopes of progress with China in tomorrow’s talks. Global stocks are narrowly mixed while bonds are marginally softer on the session, with Treasurys underperforming marginally. Gold has recovered back above $4000 while LME copper hit a record high, helped in part by hopes for progress on US/China trade."

"A range of themes and issues are pulling markets in varying directions at the start of our trading day but FX may settle into a tight range ahead of the Fed decisions this afternoon. The FOMC is widely expected to conclude with a 25bps cut in the Fed Funds target rate to 4.00%. In another dovish signal, the Fed may also indicate an end to its three-year phase of quantitative tightening (balance sheet reduction). A 1/4-point cut is fully priced in via swaps and futures for today’s meeting, with another 1/4-point cut in December priced in too. Markets anticipate the Fed funds target rate dropping to 3.00% by late 2026—also more or less fully priced in to the curve (and a view we concur with)."

"This begs the question of whether Fed monetary policy changes have the power to drive the USD much lower in the coming months. Markets anticipate a cautious easing path from the Fed, so the pace of rate cuts may still shape the USD’s performance. Unusual—by 'modern' standards—levels of dissenting opinion on policy from Fed governors recently suggest that a pick up in the pace of easing next year is not to be excluded as a risk, especially as the composition of the Fed may shift towards a more accommodative perspective in 2026. Given Chair Powell’s generally cautious approach to the policy outlook, clearly dovish guidance today could weigh on the USD."