Yesterday, the Fed cut interest rates as expected. Despite the dovish position, USD rallied as the tone was more moderate than expected, and yields strengthened rather than weakened.
UK CPI came out at 3.8% yesterday morning, in line with expectations, and is having a muted impact on GBP.
EUR moved as a bi-product, after CPI came out at 2.3% as expected.
CAD modestly weakened after the BoC cut interest rates by 0.25% in line with forecasts.
*Daily move - against G10 rates on 17.09.25
** Indicative rates - interbank rates on 17.09.25
Eyes turn to the UK today, where interest rates are expected to remain at 4.00%.
The situation in the US highlights that even when outcomes are in line with forecasts, currency markets can still defy expectations.
Yesterday, as expected, the Fed cut interest rates by 0.25% and forecast further cuts are around the corner. However, despite USD initially weakening to new lows against the EUR, it then recovered the lost ground. Weak labour market conditions, alongside a reduced case for persistent inflation were cited as the justification for the cut; however, markets interpreted this as a relatively feeble rationale.
It appeared that political pressure had influenced the Fed’s decision-making. Following the votes by the FOMC members, with just 10 members anticipating two more rate cuts this year, while 9 projected only one, consensus has now shifted towards a single cut next year.
US Yields rose as markets also interpreted Powell’s comments as less dovish than expected, thus paradoxically strengthening USD beyond the levels we had seen at the open.
Although today’s interest rate decision in the UK is expected to have a muted impact on GBP due to sticky inflation and wages growing at a faster pace than inflation, we should be mindful that this is not a foregone conclusion. If you are in line with budget levels, it may be prudent to hedge before today’s decision.
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