USD: Who let the hawks out?
The Fed delivered its first rate hike since 2023, unanimously lifting rates 25bp to 3.75-4.00%. The move itself was more than 90% priced, but the message surrounding it was considerably more hawkish than expected. The decision also carried symbolic weight, reinforcing the Fed’s independence despite sustained political pressure for lower rates.
The real surprise came from the dot plot. The median year-end rate projection rose to 4.1%, with 16 of 18 officials seeing scope for at least one further hike this year. Policymakers also marked up inflation forecasts and upgraded growth, while Chair Kevin Warsh stressed that inflation remains too high and that financial conditions are not materially restraining the economy. In effect, the Fed presented yesterday’s move as part of a tightening process rather than an isolated adjustment.
That matters because expectations had centred on a hike accompanied by reassurance that further tightening would require a high bar. Instead, the Fed signalled considerable willingness to act again. The unanimous vote only strengthened that message, particularly after July’s unusually divided 9-3 hold.
Markets responded accordingly. Equities initially absorbed the hike before turning sharply lower during Warsh’s press conference, while earlier Treasury gains reversed as investors pushed the expected policy path higher. The dollar was the clearest beneficiary, with the US dollar index climbing 0.6% to a two-month high as higher short-term yields increased its relative appeal.
The broader significance extends beyond yesterday’s move. After months of questions around policy credibility, Treasury intervention and political pressure, the Fed has delivered a forceful reminder of its inflation mandate. For the dollar, that combination of higher rates, resilient US growth and restored institutional credibility represents a considerably stronger backdrop.
EUR: Fed flexes, euro slips
EUR/USD dropped 0.7% yesterday as the Fed delivered a confidently hawkish decision. The pair entered the 1.14 zone, consolidating near 1.1450 into today’s session.
A slight reversal in the recent rise in oil prices, along with a slowdown in risk-off geopolitical headlines, has discouraged euro sellers from taking more aggressive positions.
From here, the next key support level is 1.14, which has been tested only twice so far this year: once at the height of the Middle East conflict in March, and again in June following Fed Chair Walsh’s hawkish debut meeting. On the latter occasion, the pair briefly broke below the level, hitting a one-year low of 1.1325.
In the short term, the euro would likely require a return of more positive geopolitical developments to avoid further downside. Such a shift would influence energy prices and expectations for the Fed’s next moves. Unless oil prices begin trending lower from here, the likelihood of a re-test of June’s lows will continue to grow.
For today, watch for the final release of August eurozone inflation. It is unlikely to move the euro significantly, but an upward revision would be notable given that the ECB has already delivered two rate hikes.
GBP: BoE faces a high bar for hawkish surprise
Sterling is licking its wounds from the dollar’s surge post-Fed. GBP/USD crashed through key daily moving average support levels in the lower 1.34s. As we warned earlier this week, this kind of move risk extending towards the 100-week moving average located in the lower 1.32s.
Today, the pound heads into the Bank of England (BoE) meeting with markets already positioned for a hawkish message. This week’s data, however, paint a more nuanced picture. Headline inflation rose to 3.1% in August, largely reflecting higher fuel costs, while core inflation held at 2.6% and services inflation eased to 3.4%. Combined with cooling wages, falling vacancies and seven consecutive declines in payroll employment, the evidence of a renewed domestic inflation spiral remains limited.
This matters because the UK is primarily absorbing another imported energy shock, rather than suffering from overheating demand. Plus, higher interest rates cannot produce more oil or reopen the Strait of Hormuz, and additional tightening risks compounding the real-income squeeze by inflicting further damage on an already fragile economy. So, unless higher energy costs feed materially into wages, services prices and inflation expectations, the case for immediate tightening remains weak.
We therefore expect the BoE to hold Bank Rate at 3.75% today, leaving the vote split and guidance as the main focus. The risk to the pound may lie in existing market pricing: investors still expect around three hikes by March 2027. If policymakers stress the temporary, supply-driven nature of the inflation overshoot, those expectations could unwind, eroding sterling’s yield advantage.
The same distinction matters ahead of the 28 October Budget. With much of the inflation impulse coming from abroad, any domestic measures that further raise business costs or borrowing requirements risk aggravating both the inflation and fiscal outlook.
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Calendar: September 14-18
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*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.
