Yesterday, the market focused on the Federal Reserve's policy decision. No major policy changes were expected, and the Fed held the policy rate at 4%. The dollar did not receive meaningful additional support on the news. The decision was 10-2, with Lisa Cook and Beth Hammack dissenting and calling for an immediate 25-bp hike. For now the majority prefers to keep policy unchanged.
Fed Chair Kevin Warsh said the US economy is reasonably strong and suggested third-quarter GDP growth will likely exceed 3%. On inflation, he warned that the situation is not improving and is unlikely to improve in the near term. Middle East developments raise questions, primarily through energy markets, and this could eventually produce the second-round effects many central banks fear.
The main disappointment for the dollar was the lack of a clear answer in December. Warsh said he needs more time and more data and declined to predict the next step. That is not surprising: upon taking office he made clear he would not provide the kind of explicit guidance his predecessors offered. The market reacted with a burst of volatility, but the balance of forces has not fundamentally changed and still favors the dollar.
It is also notable that Warsh has reduced the Fed's meeting cadence from eight to six next year. That means fewer formal guidance points and forecasts, and the market will pay more attention to bond yields and to Fed officials' comments outside committee decisions. Warsh said other meetings will be "about the weather"—i.e., economic conditions, inflation, and outlook—not about policy moves. In my view this is further evidence the market is entering a thinner, more cautious phase where each Fed word carries extra weight.
As for the pound and yesterday's UK budget, there were no surprises. New Chancellor John Healey presented a first budget without major surprises or unfunded promises, and the budget's buffer remains intact. Gilt yields fell, and the pound moved only marginally after the release. The market then refocused on the Fed decision, and amid Warsh's guarded stance and more subtle policy communication, Sterling recovered a little.
Looking at today's economic calendar, there are several important UK releases: mortgage approvals (consensus 54.0k vs 54.9k prior), net consumer credit, and M4 money supply change (consensus +0.3% vs +0.4% prior). These are unlikely to dramatically help the pound, but broad improvements could trigger a larger corrective rally in the morning. For the euro area there is little of note except Italy's unemployment rate. The ECB meeting is expected to leave the deposit rate unchanged at 2.50%. Lagarde is likely to say markets should price a December hike, especially given current energy prices and inflation. That could shift the balance in favour of the euro and quickly change EUR/USD after a US-data-driven sell-off. Everything will depend on the ECB's stance and Lagarde's words.
US Q3 GDP is due. After +2.1% in Q1 and +2.2% in Q2, the consensus forecasts a sharp jump to +3.2%, as Warsh suggested. The more important focus is on the PCE core index, the Fed's preferred inflation gauge; for September the consensus is +0.3% m/m and 3.1% y/y, slightly above August's +0.2% and 3.0%. Strong GDP and rising price pressure would support dollar demand and could spark another sell-off in the euro and pound.
EUR/USD—for longs I mark 1.1136; a false break there would be a buy toward 1.1158. A hold above that band and a hawkish Lagarde would give the euro a chance to rise to 1.1176 and then 1.1195, where I would take profits and look for sell-the-rally trades of 15–20 pips. Shorts on rallies are viable from 1.1158 and 1.1176 only on failed holds; the bears' immediate target is 1.1136.
If the price breaks and holds below that band, strong US data plus a cautious ECB will push EUR/USD toward 1.1115; a break below that would send the euro down to 1.1082, where I would seek buys on a 20–25 pip bounce. Longs from 1.1115 or 1.1136 are conditional on false breaks.
GBP/USD—buy levels at 1.3303 and 1.3272. False breaks there are buying opportunities aiming to regain 1.3332. A hold above that zone would open the way to 1.3361 and then 1.3390, where I would sell bounces for 25–30 pips. Shorts from 1.3361 or 1.3332 are only on failed breaks. If sellers take 1.3303, the move may extend to 1.3272 and, on strong US data, to 1.3241, where I'd look to buy the dip for 25–30 pips.
I lean toward the view that the euro and pound will remain under pressure until Lagarde's press conference, since US data could again push the dollar higher. If the ECB clearly signals a December hike, the euro could recover. The pound's prospects look better provided UK data do not disappoint.
