The initial reaction to the Federal Reserve rate hike was to take US rates and the dollar higher, even though the hike was well anticipated. In addition to the dots, which showed 16 officials see another hike as likely being appropriate this year compared with six in June, Chair Warsh’s characterization of the hike as “removing a dose of accommodation” was understood as a hawkish assessment, i.e., policy is still accommodative. However, the market still seems more hawkish than the Fed and has three more hikes discounted over the next 12 months. Still, US rates are a little softer today and the dollar is consolidating. A few weeks away from the presidential election, Brazil’s central bank cut the Selic rate by 25 bp to 13.75%, but there is little precedent for the US to change policy so close to its election, which seems to rule out another hike next month, though the Fed funds futures have slightly more than a 50% chance of it.
As expected, the Bank of England held steady (6-3 vote), but indicated a rate hike is coming. The swaps market expects a move at the next meeting in November and the possibly (~2/3 chance) of another hike before year-end. Attention shifts to tomorrow’s Bank of Japan meeting, where a hike is widely anticipated, and the door kept open to another move in Q4.
Prices
G10
• The euro approached $1.1460 yesterday after the Fed hiked rates. This met the (61.8%) retracement of the rally since late June’s low (~$1.1325). It edged down to almost $1.1455 today before recovering to about $1.1485. A break of $1.1450 could target $1.1400 next, which looks significant with 3.1 bln euros of options expiring there today and another 4.1 bln euros expiring there tomorrow.
• The dollar rose to about JPY156.40, a seven-day high against the yen post-Fed yesterday. It met the (38.2%) retracement of the decline from this month’s high (~JPY160.40). Softer US yields today ahead of the BOJ meeting tomorrow has seen the greenback ease to around JPY155.55 today. The JPY155 may offer support again. And there are ~$1.65 bln in options expiring there today and $3.5 bln expiring there tomorrow.
• Sterling was driven through the trendline from late June and late July. It settled below the 200-day moving average for the first time since late July after reaching almost $1.3370. It also overshot the (50%) retracement of the rally since late June low (~$1.3140). Follow-through selling was limited to a few hundredths of a cent today and sterling recovered to $1.3400 before the Bank of England rate decision.
• The greenback rose for the sixth consecutive session against the Canadian dollar and reached CAD1.3995 and edged a little closer to CAD1.40 today. This is about the halfway mark of the US dollar’s decline from late June high, which was near CAD1.4250. The next retracement (61.8%) is near CAD1.4050.
• The Australian dollar was sold through $0.7100 for the first time in nearly a month yesterday. It approached the (50%) retracement of the rally from the late July low (~$0.6920) that was found near $0.7090. It has recovered to about $0.7120 today. Nearby resistance is seen in the $0.7130-40 area.
EM
• The US dollar traded above MXN19.20 against the Mexican peso for the first time in a little more than a month. The greenback barely took out Tuesday’s low before the surge. It posted an ostensibly bullish outside up day. It reached MXN17.2670 yesterday and extended to almost MXN17.2745 today before stabilizing. It is holding above MXN17.20 but a break would target the MXN17.13-MXN17.15 area.
• The dollar edged higher against the offshore yuan yesterday, but the move was muted, arguably in part because of the PBOC’s signal via the fix. It has been lowering the dollar’s reference rate even as the greenback traded firmer in recent days. Many observers think that yuan must appreciate faster and the fundamental consideration is of course the external account. Some cite the inflation differential. Yet, it seems that there are sometimes conflicting forces that need to be brought into equilibrium. Sure, trade and relative inflation (though consumer prices are measured differently which makes comparisons a bit more complicated than often presented), but what about capital flows? Low-interest rate currencies have generally done poorly this year among the G10 currencies. I consider the yen an exception and beg extenuating circumstance. The dollar remains trapped in its recent trough against the offshore yuan, while the PBOC lowered the dollar’s fix for seventh consecutive session (CNY6.7580 vs. CNY6.7628 yesterday).
• The dollar traded quietly against the Indian rupee today, though it traded above INR96 for the first time since late July. Intervention helped steady it, and the dollar settled a little below INR95.94.
Other Markets
• US equities were sold in the wake of the Fed’s decision. The S&P 500 and Nasdaq Composite fell by about 1.5%-1.6% before stabilizing slightly into the close yesterday. Outside of China, Hong Kong, and South Korea, most of the other Asia Pacific bourses advanced today. Europe’s Stoxx 600 is up about 0.5% near midday after rising slightly less yesterday. US index futures are up 0.7%-1.0%.
• US rates rose following the Fed’s decision. The two-year yield rose nearly seven basis points to almost 4.74%. The 10-year yield rose by a little more than a basis point and closed above 5%. Asia Pacific yields fell today, while European benchmark yields are mostly 2-3 bp higher. The 10-year US Treasury yield is off 3-4 bp and is back below 5.0%. The two-year yield is a couple of basis points lower near 4.71%.
• Gold’s attempt to rally faltered yesterday after reaching a three-day high (~$4366.50). It was sold to almost $4235, its lowest level since August 7. It is consolidating today between about $4257.60 and $4335.40. A convincing break of $4200 would damage the technical outlook. Silver also traded on both sides of Tuesday’s range yesterday, but managed to settle within its range, after falling to its lowest level since August 7. It is trading inside yesterday’s range in quiet turnover between around $62.85-$64.45.
• October WTI fell by about 3.7% yesterday, yet it was mostly confined to Tuesday’s range. This reflected the recent volatility. On Tuesday, the contract rallied by almost 4.4%. It is subdued today but reached a four-day low near $100.40. The tone is consolidative.
Data
• Yesterday’s Fed hike saps some of the interest in today’s US data, which includes the Philadelphia Fed’s September business outlook survey, weekly jobs claims, August housing starts/permits and pending home sales. Tomorrow sees August industrial output, which is expected to have risen by around 0.3%, which is what it averaged in Q2, the best since Q1 23. Manufacturing output has risen by an average of 0.3% a month through July. Manufacturing employment rose by about 42k in the first seven months of the year, after falling 70k in Jan-July 2025 period.
• Canada reports July portfolio flows today. Canadian bonds and stocks did not appeal to foreign investors in the first part of 2025. In the first seven months of last year, foreign investors bought about C$3.5 bln of Canada’s financial assets. In the first seven months of this year, they have bought nearly C$152 bln of Canada’s stocks and bonds. Moreover, Canada’s external balance has improved. The merchandise trade deficit of C$21.7 bln in the first seven months of 2025 has swung into a surplus of almost C$50 bln in Jan-July this year. The IMF expects the current account deficit to fall to 0.2% of GDP this year from 0.9% last year.
• As widely expected, the Bank of England left policy on hold by a 6-3 vote, but the statement suggests a hike coming. And the swaps market has it fully discounted for the next meeting in November and about an 80% chance of a hike at the following meeting in December.
• Japan’s weekly portfolio flows showed Japanese investors bought JPY1.25 trillion (~$8 bln) of foreign bonds and stocks last week, after selling almost JPY370 bln in foreign assets the previous week. Japanese investors have been net buyers of foreign bonds since the intervention in late July. Ahead of the outcome of tomorrow’s Bank of Japan meeting, where a quarter point hike is fully discounted and a nearly 90% chance of a follow-up hike in December is priced into the swaps market, Japan will report September CPI. The Tokyo CPI a few weeks ago provided important input. The headline rate is seen edging up to 2.0% from 1.9% and the core rate, which excludes fresh food, looks flat at 1.8%. The core rate has not been above the 2% target this year.
Reviewed by Marc Chandler
on
September 17, 2026
Rating:
