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.
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.
BoC cuts with no forward guidance
The Bank of Canada’s decision to cut its key interest rate by 25 basis points to 2.5% marks a significant shift in its monetary policy stance. After a three-meeting pause to assess the economic impact of trade uncertainty, the Governing Council determined that the balance of risks has shifted in favor of a more stimulative policy. This move was prompted by a softening labor market, which saw employment decline over the past two months, and a diminishing upward pressure on underlying inflation. While the overall inflation picture hasn’t changed drastically, the Bank’s assessment suggests less upward risk on future inflation, particularly with the recent removal of certain retaliatory tariffs, giving it the confidence to act.
Despite the rate cut, the Bank of Canada was careful not to provide explicit forward guidance. The tone of the accompanying statement was cautious, reiterating that future decisions at its remaining two meetings this year will hinge on incoming data. This “data-dependent” approach is a direct result of the ongoing uncertainty surrounding global trade and the pressure on import prices. While the Bank is open to more cuts if necessary, it is not necessarily committed to them, as the disruptive effects of trade shifts can still add costs to the economy even as they weigh on economic activity. The upcoming review of the Canada-United States-Mexico Agreement (CUSMA) and the federal government’s November fiscal budget will be key data points for the Bank to consider, although they will not be the sole factors in its decision-making.
After today’s cut, the odds of another rate cut in October have increased to 52%, according to market pricing. This reflects a historical trend where, after a prolonged pause, a central bank’s resumption of cuts often signals a series of further reductions. If inflationary pressures remain subdued and economic weakness persists, a December cut is also a strong possibility. For now, the Bank’s message is clear: it has moved to support a weakening economy, but it will continue to proceed with caution, closely monitoring how trade disruptions and evolving economic data affect both growth and inflation in the months ahead.
USD/MXN in oversold levels, trading at 2025 lows
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 15-19
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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.
