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The Federal Reserve will announce its policy decision today. A 0.25% rate hike is almost fully priced in, which would lift the federal-funds target range from 3.75%–4.00% to 4.00%–4.25%. This would be the Fed’s first hike since 2023. As the hike itself is largely unanimously expected with the CME FedWatch tool showing a 95% probability, the US Dollar’s reaction will likely depend more on the vote, updated projections, and Chair Powell’s guidance on whether another hike is likely before year-end.
The US Dollar is firm ahead of the Fed meeting. The Dollar Index is trading close to 99.7, while USD/JPY rose as high as 155.43 overnight. The Dollar is benefiting from high Treasury yields, with the US 10-year yield still above 5%, and from the growing certainty of today’s Fed hike. Trend traders will be long of treasury yield futures, especially the US 10-Year. This can be very affordable as it is also available at the CME as a micro future. A “buy the rumour, sell the fact” Dollar reaction remains possible. Because a rate hike is already almost fully priced, the Dollar could decline if the Fed hikes but does not provide a convincingly hawkish outlook. Conversely, explicit guidance that the Fed expects further tightening would likely push the Dollar and yields higher and put Gold and risk assets under additional pressure.
The Forex market has been relatively quiet during today's Asian session, with Yen pairs and crosses in focus.
UK inflation data are due this morning. Headline UK CPI is expected to rise from 2.9% to 3.1% year-on-year in August, with core inflation forecast to remain at 2.6%. The monthly headline reading is forecast at 0.5%, up from 0.3% in July. A higher-than-expected result could strengthen Sterling and increase pressure on the Bank of England to signal a future rate hike at its policy meeting tomorrow.
The Bank of England is still expected to hold its interest rate (leave it unchanged) tomorrow. Markets expect the BoE to leave Bank Rate unchanged at 3.75%, although the vote split will be closely watched. The expected vote is six members to hold and three to hike, while markets continue to price a meaningful chance of a 0.25% increase before year-end.fnarena+1
Crude Oil remains elevated despite a modest pullback. Brent Crude settled near $109 yesterday after gaining almost 20% so far in September, while WTI settled at its highest level since mid-May. This morning, Brent is near $108 and WTI near $105 as the market pares some risk premium following a reported US inventory build. Crude Oil remains very dangerous to trade as its price movements are so reactive to geopolitical developments concerning the Persian Gulf and the Strait of Hormuz. Crude Oil remains the central inflation risk. The postponement of talks on a temporary shipping lane through the Strait of Hormuz and fresh regional attacks are keeping the energy-supply risk premium high. Any signs of restored shipping flows could produce a sharp correction, but traders should not assume that a pullback signals the end of the wider bullish oil trend.
The Japanese Yen remains weaker ahead of the Bank of Japan. USD/JPY has risen above 155.00 as the market focuses on the more immediate Fed decision. The BoJ is still expected to raise rates by 0.25% at its meeting this Friday, but the near-term direction of USD/JPY will depend heavily on today’s Fed guidance and whether the pair can sustain trading above 155.00.
Agricultural commodities remain relatively elevated, but have mostly come off their recent highs far enough to see trend traders exit long trades in Sugar and Wheat. Soybeans remains a standout performer, with the price action still looking confidently bullish, so trend traders will still be involved here on the long side. Soybeans continue to be helped by renewed Chinese demand, firm processing demand, and limited Brazilian farmer selling.
Gold is recovering after reaching a new 1-month low but is currently being held by the fresh resistance level at $4,335. If it can break out above this and remain above that level, that will be a bullish sign.