Fed Holds Steady Amid Stagflation Worries, Triggers Broad USD Rally
The Federal Reserve kept interest rates unchanged as expected but signaled a cautious tone amid growing concerns over stagflation—rising inflation coupled with weakening employment. Chair Jerome Powell made clear that the Fed is in no rush to initiate rate cuts, instead opting to monitor the economic effects of existing policies and external shocks like U.S. tariffs.
Despite the uncomfortable macroeconomic outlook, equity markets took the announcement in stride. Wall Street closed higher, with S&P 500 futures gaining 1.11% by early morning. Asian markets followed suit—Japan’s Topix nudged up 0.09%, and Australia’s ASX 200 added 0.16%. European indices were buoyed by optimism surrounding a potential UK-US trade agreement, with the DAX rising 1.22% and the CAC 40 up 1.04%.
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US Dollar Strengthens Across the Board
The U.S. dollar saw broad-based gains following the Fed’s policy decision. The hawkish undertones of the announcement encouraged investors to rotate back into the greenback, as rising interest rate differentials against other major currencies added support.
- EURUSD fluctuated between 1.1271 and 1.1336, rising in Asian trade before retreating in European hours and drifting toward session lows in New York. The euro remains under pressure, hampered by the European Central Bank’s dovish stance and the perception that the Fed may hold steady for longer.
- GBPUSD traded in a 1.3261 to 1.3357 range, spiking after the Bank of England cut rates by 25 basis points to 4.25%. While this move was anticipated, markets are split on whether the BoE will deepen its dovish tone. Any downside pressure on the pound may be tempered if positive sentiment surrounding the UK-US trade shift holds.
- USDJPY climbed steadily from 143.45 to 145.00 before stalling. Hopes for a broader easing of trade tensions reduced safe-haven demand for the yen. However, expectations that the Bank of Japan may tighten policy again could cap further upside for USDJPY.
- AUDUSD was volatile within a 0.6403 to 0.6465 band. After a brief bounce in Asia, the Aussie dollar reversed in Europe, then stabilized in the New York session. The pair remains caught between a dovish Reserve Bank of Australia and a cautious yet firmer Federal Reserve.
Canadian Dollar Weakens Post-Fed Decision
The Canadian dollar lost ground after the Fed’s announcement, with USDCAD opening at 1.3884 and closing lower at 1.3841, despite touching an overnight low of 1.3813. The outlook for the loonie has dimmed, as the Fed’s stance implies limited U.S. economic slowdown—typically a key driver for commodity-linked currencies like the CAD.
WTI crude oil traded choppily in a range between $59.20 and $57.75, ultimately settling at $58.79. Continued OPEC production cut reversals and fears of a broader economic slowdown are seen capping any significant upside for crude prices. Gold was priced at $3331.59, reflecting ongoing market uncertainty.
Today at 10:00 ET, Bank of Canada Governor Tiff Macklem will hold a press conference to discuss the Financial Stability Report. Markets will be watching for any signals on how the BoC interprets recent global central bank moves and domestic vulnerabilities.
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UK-US Trade Announcement in Focus at 10:00 AM
Markets are also poised for a scheduled 10:00 AM announcement regarding a potential UK-US trade deal. While some analysts suspect the move may be more symbolic than substantive, any sign of progress on trade realignment could influence broader risk sentiment, especially in post-Brexit Britain.
Looking Ahead: US Data on Tap
Today’s U.S. economic calendar features weekly jobless claims and wholesale inventory figures. These releases could further refine market expectations for Fed policy going into the next quarter.