The dollar slides on pared back hiking expectations
The dollar fell after the Fed held rates at 3.50-3.75% and September hike odds eased, while markets focus on US GDP, core PCE and escalating US-Iran tensions.
USD
The dollar spent Wednesday in tight ranges before the main event. The FOMC held rates at 3.50-3.75%, matching our call, though Hammack, Kashkari, and Logan all dissented in favour of a 25bp hike, marking the most unified hawkish dissent since September 2016. With Chair Warsh again offering no forward guidance and framing the split as a welcome family fight, the greenback shed around 0.6% as September hike odds slipped to just above 50%, having been near-fully priced pre-meeting. Long-end Treasuries told a different story, the 30-year yield spiking to its highest since 2007. Overnight, the pause in Middle East hostilities definitively ended, seeing further US-Iran strikes, with higher oil and risk aversion cushioning the buck's post-Fed slide. Today's 13:30 BST deluge brings advance Q2 GDP, seen at 2.0% annualised, alongside June core PCE, expected to ease to 3.3%, plus claims. Soft prints would validate our call for no change through 2026, keeping dollar risks skewed modestly lower, further escalation notwithstanding.
EUR
Having spent Wednesday morning pinned near the floor of its post-June range, the euro was a passive beneficiary of the Fed, climbing back into the mid-1.14s overnight. Attention now turns to this morning's data, headlined by the 10:00 BST flash Q2 GDP print, and national July CPI reports throughout the day. Already this morning, Spanish CPI data has surprised to the upside, with core price growth at 3.0% YoY, 0.2pp above expectations. German preliminary July inflation at 13:00 BST then offers a further steer for tomorrow's eurozone flash print, which we see ticking up to 2.9% on the headline with core at 2.4% — outturns that would embolden the Governing Council hawks. A downside GDP miss, however, could sharpen the stagflationary trade-off and leave EURUSD capped either way.
GBP
Sterling struggled to breach 1.33 through Wednesday morning, in keeping with our view that a larger fiscal premium should be attached to Prime Minister Burnham's government, before cable added around 0.5% to stabilise in the mid-1.33s post-Fed. That move has faded somewhat overnight, ahead of today's Bank of England decision, where no change is expected. Indeed, all 48 economists polled by Bloomberg look for Bank Rate to stay at 3.75%, so the signal lies in the accompanying Monetary Policy Report and minutes at 12:00 BST, and in the vote split after June's 7–2 division. Markets still indicate a full hike by November, pricing we continue to see as overly hawkish. Our expectation is for further pushback from Governor Bailey at the press conference, which, alongside political uncertainty, should keep sterling a G10 laggard today.
CAD
The loonie was arguably Wednesday's quiet winner, breaking clean below 1.41 post-Fed, vindicating our note that a hold would swing rate differentials in CAD's favour. A Brent surge to near $90, on the resumption of US-Iran strikes, added tailwinds despite souring risk appetite. The BoC's Summary of Deliberations, published at 18:30 BST, added colour on July's hold at 2.25%: Governing Council members were split over the durability of the recovery, and policymakers flagged the widening US-Canada yield gap as a driver of the loonie's depreciation, with oil well down from April's $120 peak before July's rebound. That reads as a wait-and-see Council, and we still think the hike partially priced by December overstates its appetite. Today's domestic calendar is bare, leaving 13:30 BST US data and Gulf headlines in charge, before tomorrow's May GDP, seen up 0.2%. A sustained break below 1.40 likely needs calmer geopolitics and a resolution to ongoing US-Canada trade tensions.