Above: File image of Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.
The Federal Reserve is divided on where to take interest rates next, deflating hopes for a number of rate cuts this year.
The dollar extends gains against the British pound, euro and most other currencies following a surprising split at the U.S. central bank that punctures the 'dovish' Fed narrative of recent months.
The Federal Reserve's policy committee (the FOMC) left policy unchanged - as was expected - at its April meeting, but the vote was split 8–4, suggesting dissent is building in the ranks.
One dissenter - Miran - wanted a rate cut, and three agreed with the decision to hold rates, but did not want the Fed to communicate a preference to maintain an easing bias in the statement
"U.S. bond markets reacted sharply to the Fed’s divided decision, with hawkish dissent over statement language in focus, pushing the 2-year yield up 11bps and the 10-year 8bps," says Luka Belobrajdic, Economist at Westpac Group. "FX markets saw broad USD strength."
The pound-dollar exchange rate slips below support at 1.3480 and looks likely to maintain a heavy tone in the short-term.
Fed Chairman Jerome Powell reinforced the 'hawkish' tone set by the statement in ensuing comments made in the press conference, stating that the overall balance of the committee was closer to neutral now, and for the Fed to consider rate cuts, inflation would need to evolve lower over the coming quarters.
With a firm economy, stabilising employment dynamics and Iran war-induced inflation, the takeaway is that the odds of a rate cut in the U.S. this year have greatly diminished.
The dollar has come under pressure over recent months as investors brace for the Fed to cut interest rates faster than elsewhere in the world. Remove that bias and the dollar is better supported.
"The guidance is closer to the end of the year than anytime soon, the impact of leadership changes notwithstanding. Given the (high) likelihood of inflation persistence, the overall message is more like a slow retreat," says Sam Hill, Head of Market Insights at Lloyds Bank.
Beyond monetary policy, the geopolitical backdrop also stays supportive of the dollar:
Equity markets were subdued; developments in the Middle East are dominating sentiment, as President Trump rejects Tehran's latest peace proposals. Oil prices surged, with Brent climbing to its highest level since 2022.
"The dollar faces more upside risks as oil prices surged to new wartime highs," says Francesco Pesole, FX Strategist at ING Bank.
