• Fed raises rates for first time in three years, see one more in 2026
• Warsh: Summer data have not shown meaningful inflation progress
• Dollar jumps after Fed’s rate hike, sends hawkish signal
• Gold slides as markets see three more Fed rate rises in total

FX Analysis

USD rose strongly and for a fifth straight day as the Fed raised rates by 25bps as expected, with a unanimous vote. Key were the quarterly updated forecasts, with another rate rise predicted before year-end and then one more in 2027. Interesting in the statement was the use of the word ‘timelier’ in searching for a drop in inflation. But core PCE isn’t seen at the 2% target until 2029. Chair Warsh said the economy was in good shape with improved hiring and investment in recent months. But underlying price trends have not meaningfully improved, and he consistently reaffirmed his keen focus to deliver on price stability. The Dollar Index moved above its 50-day SMA at 99.92 with next resistance at 100.32.

All in, this was a hawkish hike with inflation-fighting credibility reaffirmed and now around three more rate hikes fully priced in by June 2027. Data saw retail sales rebound sharply in August with the biggest increase since March, driven by consumer spending. This caused economists to raise GDP forecasts.

EUR fell sharply through strong support that we highlighted yesterday around 1.15. The Fed’s hawkish dot plot and statement saw prices also move further away from its 50-day SMA at 1.1534. Sentiment has been the big driver. The 12-0 Fed hike vote was significant and points to a united committee which may come up against a stern White House.

GBP underperformed its peers as prices fell sharply through the 200-day SMA at 1.3450. Headline inflation edged up to 3.1% as expected, while core and services were unchanged from the prior month. There was little sign of a broadening out of price pressures, or second round effects. Food inflation slipped and ‘core’ services remain benign. This week’s data doesn’t point to a hawkish BoE. See more below for the BoE meeting preview.

JPY softened for a third straight day with the major getting above the early August spike low at 155.22. Two-year Treasury yields climbed more than the longer end and 10-year Treasuries. Focus turns to the BoJ meeting on Friday with a rate hike baked in and what Governor Ueda says about rates and inflation going forward.

Stock Market Analysis

US stocks: The S&P 500 lost 0.4% to close at 7,555. The Nasdaq closed up 0.03% at 28,945. The Dow Jones settled lower by 1.21% at 5`1,463. Sectors were predominantly lower again, with weakness led by Energy, Financials and Materials. Tech, Health Care and Utilities were the only sectors in the green. As we highlighted above, we want to emphasise the Fed’s economic projections that show 2% inflation only in 2029. That contrasts with Chair Warsh’s hawkish tone which suggests possible more aggressive front-loading of rate hikes if inflation trends do not break by the fourth quarter. Intel climbed 4% on reports it is discussing US memory chip production with SK Hynix. A deal would add further credibility to Intel’s AI turnaround, after Nivida and SpaceX partnerships. Falling crude prices hit energy names with ConocoPhillips off 6.2% and Occidental Petroleum down 6.6%.

Asian Stocks: Futures are mixed. APAC stocks were mixed in choppy trade with focus on the FOMC meeting. The ASX 200 edged higher helped by commodity sectors but offset by tech weakness. The Nikkei 225 was subdued on mixed data. The Hang Seng and Shanghai Comp were mixed as Hong Kong unveiled its five ever Five-Year plan to align more closely with the mainland.

Gold Analysis

Gold spent the day in the green until the Fed decision and Warsh press conference after which it turned negative. The 50-day SMA was breached at $4,272. As we wrote yesterday, a hawkish FOMC should see next big support just below $4,100 and then around $4,000. More rater hikes make non-yielding asset less attractive.

Day Ahead – Bank of England Meeting

The BoE is predicted to keep rates unchanged at 3.75%, with around a 14% chance of a 25bps rate hike. It will likely be a 6-3 vote split, matching July’s vote. Despite higher energy prices, tighter financial conditions and limited signs of second-round effects give the MPC scope to wait for a bit longer. How much longer? A November rise is virtually fully priced, as headline inflation is forecast to move higher, potentially above 4%.

Key for policymakers are second-round effects, and the UK economy is far less susceptible to these than it was during the Ukraine shock four years ago. Ultimately, inflation is currently behaving fairly predictably, which wasn’t the case back in 2022, when the data was consistently coming in above forecasts. Of course, beyond September, a more resilient economy could give firms greater scope to pass through higher energy costs, increasing the likelihood of a hike if energy prices remain elevated.

Chart of the Day – GBP/USD falls sharply

The BoE is highly dependent on crude oil prices, and especially their impact on the wider economy. Indeed, Governor Bailey recently said that there were two elements to determining the monetary policy outlook: where energy prices were going and how large will be the second round effects. With Brent above $100, markets price in a rate hike at the next meeting in November, with 45bps by year end and around 100bps by June 2027. How hawkish will the MPC be and can it match or exceed these expectations? Disappointment could see cable reinforce the slide below the 200-day and 100-day SMAs at 1.3450/39. Yesterday saw prices also fall through a major Fib level of this year’s high to low at 1.3417. The next minor retracement level is 1.3310 which is near in May, June and July.