Image © European Central Bank
The dollar loses some rate support after Chair Warsh declined to commit to a December hike, leaving the pound room to hold above $1.33.
The dollar softened after the Federal Reserve left rates on hold and Chair Kevin Warsh's press conference pulled short-dated US yields lower, leaving the Pound to Dollar exchange rate at 1.3316 on Thursday.
"The US dollar has continued to trade at modestly weaker levels overnight after yesterday’s FOMC meeting. The US dollar has been undermined by the scaling back of Fed rate hike expectations," says Lee Hardman, FX Strategist at MUFG Bank Ltd.
The dollar's retreat lifts the GBP/USD pair back above the 21-day moving average at 1.3287 and the 1.3302 line it fell through on Tuesday, with the October rally's 1.3274 base intact beneath:
Above: GBP/USD at daily intervals, lifted back above the 21-day moving average by the dollar's retreat.
The dollar draws its strength from Fed hike expectations, so a Chair who declines to commit to a timetable takes some of that support away even when the decision itself is unchanged.
The Fed voted 10-2 to hold the funds rate at 3.75% to 4.00%, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favour of a hike.
"The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2% goal," says the statement.
The statement upgraded its description of economic activity to "strong" from "solid", which reads hawkish, and the dollar initially rose with yields.
"While rates initially increased across the curve after the FOMC statement, investors interpreted Chair Warsh's comments dovishly, specifically, that quashing inflation is not about a fixed calendar date and that he felt positive about inflation expectations signposts," says Alex Li, Head of US Rates Strategy at Crédit Agricole.
The two-year Treasury yield dropped around 8 basis points from its intraday peak to 4.70%, and the Dollar Index fell 0.4% to 102.1.
Warsh said financial conditions had tightened but was unwilling to call them tight, which KBC says marks a shift from calling them "accommodative" in September and is one of the two reasons the Fed held.
"The modestly weaker USD may reflect Chair Warsh's post-meeting comments, which did not clearly signal the Fed is prepared to tighten policy aggressively to curb inflation," says Samara Hammoud, Economist at Commonwealth Bank of Australia.
December Stays the Base Case for the Next Move
The hold has not removed the December hike from analyst forecasts, which is why the dollar's pullback has stayed small.
"With two members already dissenting, and core CPI inflation has come in higher than expected in the last two months, and most members agreeing on one additional hike by year end, the case for a December hike is still strong," says Helen Lao, Economist at CIBC Capital Markets.
Markets price around 21 basis points of hikes for December and 46 through March, roughly in line with Crédit Agricole's call for two moves by March.
CBA expects the dollar to recover quickly from Wednesday's weakness, and KBC says next week's GDP and PCE data will underscore the strength of the economy and the price pressures that go with it.
Pantheon Macroeconomics takes the other side: "markets are right to question the FOMC's appetite for extended tightening," says Samuel Tombs, Chief US Economist, who sees falling inflation and rising unemployment in 2027 allowing the Fed to stop hiking and cut rates by 75 basis points by year-end.
The Fed also announced that one of its eight 2027 meetings will carry no policy vote, and two in 2028, which CBA says could see markets price larger moves into individual meetings and raise volatility.
The Pound Side: Budget Passes Quietly
Chancellor John Healey's Budget was low-key and cautious, deferring larger decisions to the 2027 spending review, and the 10-year gilt yield fell around 2 basis points to 5.32% on the day.
That is the outcome our house view required: a non-event Budget that lets the pound recover in its wake, with the Bank of England's 5 November decision the next catalyst.
The dollar now needs Friday's PCE data to rebuild its rate support, and until it does a daily close above 1.3336, Wednesday's high, would reopen the 1.34 highs of last week.
The dollar reasserting itself would show first in a break below 1.3274.
