USD: Reversal day
The U.S. dollar staged a sharp reversal following the Fed press conference, erasing its earlier losses and dragging the EUR/USD down more than 100 pips from a high of 1.1919 to 1.181. The press conference was surprisingly hawkish relative to expectations. Fed Chair Jerome Powell mentioned during the presser that “there wasn’t widespread support at all for a 50bp rate cut” and that “you could look at this as a risk management rate cut.” That framing marked a clear shift from the dovish tone of the initial policy statement and Summary of Economic Projections (SEP). While the Fed did cut rates by 25 basis points, Powell’s remarks emphasized caution rather than conviction, highlighting internal divisions within the Committee and the complexity of the current economic backdrop.
At the heart of that complexity is a growing tension between the Fed’s dual mandate. This won’t likely be resolved anytime soon, making forward guidance complicated for the foreseeable future. Inflation risks remain tilted to the upside, while employment risks are now clearly to the downside. The SEP reflects this balancing act: the median official projects another half-point of easing by year-end and a further quarter-point cut in 2026, slightly more than anticipated in June. Yet inflation is expected to remain sticky, with core PCE still forecast at 3.1% through 2025. Meanwhile, growth estimates have been revised upward to 1.6% in 2025 and 1.8% in 2026, suggesting a more resilient economy even as labor market indicators soften.
Powell also addressed the political sensitivities surrounding Fed independence, particularly in light of Governor Stephen Miran’s ties to the White House. Asked directly, Powell declined to comment. His refusal to engage on the issue was notable, especially given the broader context of the Fed’s credibility and autonomy in a politically charged environment. Powell reiterated that the Fed is “not on a pre-set course,” and that future decisions will be guided by incoming data, not political pressure.
Markets responded swiftly to the shift in tone. The 10-year Treasury yield, which had initially dropped after the release, rebounded sharply during Powell’s remarks. The DXY index mirrored the move, reversing its earlier losses and lifting the dollar off its session lows. What began as a dovish signal quickly evolved into a recalibration of rate expectations, as Powell’s emphasis on inflation risks and limited support for a larger cut tempered hopes for a more aggressive easing cycle. This reversal unfolded even as markets continue to price in two additional rate cuts this year, with growing anticipation that internal divisions within the Committee will intensify in the meetings ahead.
GBP: Attention shifts to BoE decision
Sterling briefly spiked above $1.37 following the Fed’s rate cut but quickly reversed, now trading below $1.36 ahead of today’s Bank of England (BoE) decision. Against the euro, sterling continues to trade sideways, holding within a tight €1.15–€1.16 band through September. The pair appears anchored by balanced rate expectations and muted macro surprises. Without a fresh catalyst – be it a material shift in BoE or ECB policy, or a sharp turn in data – the current range looks likely to persist.
Back to GBP/USD though. The post-Fed move resembled a classic “buy the rumour, sell the fact” reaction, fuelled further by Powell’s hawkish press conference. Still, with the Fed now easing, he BoE’s more cautious stance keeps policy divergence in play, which could support another test of the $1.3787 high before year-end. That said, a pullback toward $1.35 remains plausible in the near term. Today’s BoE decision may prove pivotal. Any surprises in tone or vote split could help steer GBP/USD out of its current chop and set the tone for Q4 positioning.
We expect the BoE to keep Bank Rate at 4% and slow the pace of quantitative tightening (QT) amid concerns about bond market volatility. A September cut was always unlikely, and recent data has done little to shift that view. Markets are aligned, pricing just a 2% chance of a rate cut. The expected vote split is 8-1, with Alan Taylor likely dissenting in favour of a 25bp reduction.
Looking ahead, further easing remains on the table, but the MPC is likely to proceed cautiously. August’s meeting revealed a tight vote and hawkish tone, with inflation risks taking precedence over growth and labour concerns. Slowing wage growth hasn’t yet translated into lower services inflation, and elevated food and fuel prices could push up household expectations.
Meanwhile, QT may be the more market-sensitive decision today. Maintaining the current £100bn pace risks jolting gilt yields amid recent volatility. We expect the MPC to lower next year’s target to around £75bn, implying £26bn in active sales. A deeper cut is possible if the committee aims to avoid market disruption.
The BoE has flagged structural shifts in the gilt market and rising global bond issuance as potential risks to QT execution. We anticipate a tilt toward selling short- and medium-dated gilts, where liquidity is stronger, and stress less acute. Long-end yields have risen sharply since last September’s QT announcement, underscoring the need for a more calibrated approach.
EUR: High bar, flat close
EUR/USD secured a new year-to-date high on Tuesday at 1.1878, rallying on expectations that the Fed would commence its easing cycle the following day.
However, as we had already flagged, with markets pricing in nearly three full cuts by year-end, they were well positioned to absorb the much-anticipated dovish turn from Powell. In other words, the bar for further dollar downside was already high. Given the Fed’s tone in recent months – marked by lingering inflation and uncertainty concerns – a cautious, wait-and-see approach behind a more dovish posture was likely. Still, markets may have hoped for hints of a more aggressive easing bias. As a result, EUR/USD closed the session flat.
Looking ahead, while a more frequent easing tempo is likely to follow, the meeting-by-meeting tone that emerged could easily stretch out that tempo, diluting the bearish impact on the dollar.
We expect EUR/USD to consolidate above 1.18, with that level now acting as key support – previously resistance – as the pair remains fundamentally better supported than it was in early July, when an unrealized dovish tilt from the Fed briefly pushed it into the 1.18 zone. At that time, however, the ECB’s hawkish stance was not as firm as it is today, now that the bank has reached the end of its easing cycle.
The pair will likely tread water around these levels in the short term, with further dents in euro sentiment – such as trade negotiations – likely to drag it back below 1.18.
Safe haven Swiss franc shines
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 15-19
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
