The dollar rises as the Fed delivers on tightening
The dollar surged to a seven-week high after the Fed raised rates by 25bp and signalled at least one further hike this year. The move pressured the euro and sterling, while USDCAD approached 1.40 amid softer oil prices.
USD
The dollar surged after the Fed delivered a 25bp hike to 3.75–4.00% yesterday evening, its first increase since 2023. The DXY climbed from roughly 99.7 pre-decision to above 100.3, a seven-week high, after Chair Warsh stressed that inflation remains the Fed's "predominant concern" and the dots signalled at least one further hike this year, with swaps now pricing around even odds of an October follow-up. With hostilities in the Middle East keeping energy prices elevated and inflation risks skewed to the upside, we think the greenback retains near-term support, but ultimately, our view remains that the FOMC will fail to match market expectations, which price a further three hikes over the coming 12 months. Today's docket brings weekly jobless claims, the Philly Fed survey, housing starts and building permits at 13:30 BST. Firm prints risk extending the post-FOMC rally, though some consolidation after yesterday's move would not surprise.
EUR
The euro slipped below 1.15 to multi-week lows as the post-FOMC dollar bid compounded an already soft week for the single currency. Tuesday's ZEW surveys, which saw eurozone sentiment plunge to 25.8 from 31.4, underscored the drag from the energy crisis as disruption around the Strait of Hormuz keeps crude elevated. The ECB's 25bp hike to 2.50% last week, alongside upgraded inflation forecasts, has offered the euro only limited support, with the single currency remaining hostage to crude and Fed pricing while Hormuz flows are impaired. That said, easing oil prices overnight should offer the euro some marginal relief this morning. Today's calendar is otherwise headlined by remarks from ECB Chief Economist Lane; absent surprises, we expect the pair to trade with a defensive tone into the BoE at midday.
GBP
Wednesday saw sterling fall below 1.34 against the dollar for the first time since late July, a third consecutive daily decline, largely in response to US developments after domestic data offered few surprises. Wednesday's CPI report showed headline inflation rising to a five-month high of 3.1% in August, but with services inflation holding at 3.4%, below expectations, market reaction was muted. The Fed instead dictated price action, with dollar gains pushing cable lower. Today, attention turns to the Bank of England at 12:00 BST, where we, like consensus, expect Bank Rate to be held at 3.75%, with a 6-3 voting split. That breakdown, plus the minutes' characterisation of Middle East-driven inflation risks, will do the heavy lifting for markets - we do see risks of a closer 5-4 division that could prove sterling supportive. Our base case, however, anticipates an emphasis on cooling wage growth, and on underlying disinflation from a majority of the committee, leaving us skewed in favour of a softer pound this afternoon.
CAD
We flagged Wednesday morning that a hawkish Fed could push the USDCAD towards 1.40, and it now trades within touching distance after yesterday’s decision. Domestic drivers offer little resistance at present, with moderate inflation and a soft labour market giving the Bank of Canada no catalyst to move off 2.25%, despite markets pricing a meaningful chance of an October 28th hike. Meanwhile, crude has turned from tailwind to headwind — Brent's slide to around $105 on reports of Saudi shipments bypassing Hormuz via Oman removes a key prop, even as the broader Middle East conflict keeps prices historically elevated. With the domestic calendar bare today, direction comes from US data at 13:30 BST and Hormuz headlines; we expect near-term consolidation around present levels.