USD: The dollar’s double take
Four key US equity benchmarks, the S&P 500, Nasdaq 100, Dow Jones Industrial Average, and Russell 2000 all closed at record highs simultaneously on Thursday, a rare event that has occurred only 25 other times this century. This isn’t just megacap tech leading the charge. The Russell 2000’s breakout shows small caps are participating, which often reflects confidence in domestic growth and risk appetite. The gains mark a reversal from traders’ choppy reaction to the Federal Reserve’s (Fed) decision to cut interest rates in the previous session.
Markets initially embraced the Fed’s latest move as dovish. Aside from Miran’s lone 50bp dissent, the revised Dot Plot pointed to two more rate cuts this year, triggering a drop in short-term yields and a softer dollar. But that narrative didn’t last. As Chair Powell began his press conference, sentiment flipped fast: two-year swap rates surged past pre-meeting levels, the yield curve steepened, equities declined and the dollar index not only recovered but extended gains into Thursday, posting its strongest daily performance in weeks.
This reversal wasn’t just about Powell’s tone – it was also about positioning. Traders appeared to unwind dovish bets, and Powell’s reluctance to label inflation as “transitory” left the door open for further price pressures. His framing of the cut as a “risk-management” move also diluted the dovish signal from the Dot Plot. For those questioning the Fed’s independence, Powell’s delivery offered reassurance. Still, the dollar’s bounce looks more like a positioning squeeze than a sustainable trend and if the equity rebound is anything to go by, the dollar’s recovery is likely to be fleeting. Indeed, lower funding costs are also likely to encourage increased hedging activity in USD, which could act as a brake on any significant upward moves in the currency.
Hence, despite the market whiplash, we see this as a bearish development for the dollar. The Fed has clearly shifted toward easing, with its focus now tilting toward employment. We continue to expect two more 25bp cuts this year, and believe lower funding costs will weigh on the buck – especially as seasonal headwinds build into year-end.
Meanwhile, the Bank of Japan’s decision added fresh fuel to FX markets. Two dissenting votes have led traders to price in higher odds of a 25bp hike at the October meeting, propelling the yen to the top of the G10 leaderboard today.
GBP: No surprises, no support for sterling
The British pound is under pressure after the Bank of England’s (BoE) September meeting delivered exactly what markets expected: no change to the Bank Rate, which held steady at 4%, and a familiar 7–2 vote split, with two members again advocating for a modest cut. The pound’s initial calm gave way to a late-session slide, with GBP/USD hovering just above $1.35 this morning having been at fresh 2-month highs above $1.37 just two days prior.
The BoE’s decision to slow the pace of quantitative tightening – from £100bn to £70bn annually – also landed in line with forecasts. With long-end yields under pressure and fiscal concerns mounting, the Bank’s move to concentrate gilt sales in shorter maturities signaled a desire to avoid stirring further volatility. While sensible, it reinforced the idea that the BoE is in cautious retreat – not a currency-supportive stance.
The tone of the minutes was cautious but consistent. The MPC reiterated its “gradual and careful” approach to policy withdrawal, offering no hints of a near-term pivot. Inflation expectations remain front of mind, and the committee looks set to extend its pause through year-end, with any easing likely pushed into 2026.
In short, the BoE is choosing stability over surprise – tight enough to anchor inflation, but tactful enough to avoid unsettling fragile markets.
Sterling didn’t fall because of what the BoE did – it fell because of what it didn’t say. The absence of a strong signal left traders to fill in the blanks, and the result was a slow fade into the close. Moreover, the UK’s August borrowing figures this morning were a gut punch to sterling sentiment. Public sector net borrowing surged to £18.0 billion, overshooting every forecast and marking the highest August print in five years.
EUR: EUR/USD tests the narrative
The euro’s rise has long been driven more by US dynamics than eurozone fundamentals – but never more so than today. While sentiment remains overall supportive of the euro, when it comes to fundamentals, the ECB has already delivered all it could to bolster the common currency, that is, the end of its easing cycle. As a result, the euro is now even more reliant on the US dollar narrative to reach fresh cycle highs.
Meanwhile, stronger-than-expected US jobless claims data boosted the dollar yesterday, causing EUR/USD to close down 0.2%. This move also reflected some positioning readjustment after the pre-policy meeting rally, which had pushed EUR/USD to new cycle highs of 1.1919, as traders digested what turned out to be a more hawkish rate cut than anticipated.
The Fed-fueled rally earlier this week had spillover effects on sentiment. The euro perked up, with risk reversals – a gauge of market sentiment toward a currency – reaching levels not seen since early August. However, some of those gains were pared back following a moderate hawkish repricing in the 2-year US OIS curve after the meeting. The euro is on set to close a mere ~0.3% against the dollar this week.
Euro holds firm across the board
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 15-19
All times are in BST
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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.
