Forex Today: Crucial Fed rate decision looms as US Dollar consolidates weekly gains

What is in focus for markets on Wednesday, 28 October?

Resilience in the US Dollar (USD) continues against its peers early on Wednesday. After three consecutive days of gains, the USD Index is holding near 102.50 at fresh two-week highs. Attention now turns to the Federal Reserve (Fed), which will release its interest rate decision following its two-day policy meeting later in the American session. Fed Chair Kevin Warsh will then discuss the outlook at a press conference.

Caution is evident in mixed US stock index futures, while the benchmark 10-year US Treasury bond yield remains above 5% after a modest recovery. The broad market expectation is for the Fed to leave policy unchanged, keeping the federal funds rate in the 3.75%-4% range.

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Can the AI tailwind and hawkish Fed risks keep USD supported as December draws focus?

With AI-related risk appetite returning and oil prices easing, OCBC strategists say the US Dollar “was broadly steady overnight as appetite for AI-related risk returned and oil prices eased.” While recognising that “the AI tailwind could fade in 2027,” they maintain that “it is still too early to position for a weaker USD on an AI downturn.” Their current assessment is that “hawkish Fed risk should keep the USD supported, although the trade is becoming less one-way.”

Turning to monetary policy, OCBC states that “we expect the Federal Reserve to stay on hold in October, with the focus shifting quickly to December.” Further tightening remains a possibility, with the strategists pointing out that “September CPI surprised to the upside, while most FOMC participants had already indicated that another hike could be appropriate by year-end,” in their assessment.

Markets had anticipated a 25 basis points (bps) increase, but the Reserve Bank of New Zealand (RBNZ) kept its policy rate at 2.75% during Asian trading hours. Its policy statement indicated that future interest rate increases were probable, while stressing that they would depend on the economic outlook. NZD/USD faced intense selling pressure after the RBNZ announcement, with the latest reading showing a 1.3% daily loss near 0.5600.

Australian data released on Wednesday put annual Consumer Price Index growth at 4.3%, above both August's 4% increase and the market forecast of 4.2%. AUD/USD retains modest gains for the day near 0.7030, having climbed above 0.7050 to a one-month high after the inflation release.

USD/CAD trades above 1.4050 early on Wednesday, registering a slight rise. Later in the day, the Bank of Canada (BoC) is also due to announce its monetary policy decisions. Markets expect an interest rate increase of 25 bps, taking the rate from 2.25% to 2.5%.

EUR/USD remains under pressure and is heading towards 1.1100, following Tuesday's decline of more than 0.4%.

GBP/USD is trading below 1.3300 in Wednesday's European session as its decline continues after three consecutive days of losses.

Gold is moving within a narrow band around $4,050 early on Wednesday, after an upward correction on Tuesday delivered a daily gain of more than 1%.

Can Gold hold above its key threshold as the Fed meeting takes centre stage?

As attention turns to the Fed, ING strategists observe that Gold has “climbed back above $4,000/oz after briefly falling below the key level in Tuesday’s trading session, as attention shifts to the Federal Reserve's 28 October meeting.” They describe the metal as “finding its feet again after the recent correction attracted bargain hunters and physical buyers,” while also warning that “ETF outflows have recently been a headwind.”

USD/JPY is consolidating above 157.50, following advances on both Monday and Tuesday.

Frequently asked questions about the Fed

How does the Federal Reserve's role influence the US Dollar?

The Federal Reserve (Fed) sets US monetary policy with a dual mandate: maintaining price stability and promoting full employment. Adjustments to interest rates are its main means of pursuing these objectives. If prices rise too rapidly and inflation exceeds the Fed’s 2% target, it increases interest rates, pushing up borrowing costs across the economy. The resulting increase in the appeal of US investments to international investors strengthens the US Dollar (USD). By contrast, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates to stimulate borrowing. Such a move puts pressure on the Greenback.

What is the frequency of the Fed's monetary policy meetings?

At eight policy meetings each year, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) reviews economic conditions and decides on monetary policy. Twelve Fed officials participate: the Board of Governors' seven members, the president of the Federal Reserve Bank of New York and four presidents drawn from the remaining eleven regional Reserve Banks. The latter serve one-year terms on a rotating basis.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When faced with extreme conditions, the Federal Reserve may turn to Quantitative Easing (QE), a policy designed to substantially expand the flow of credit through a stalled financial system. Used in crises or periods of exceptionally low inflation, this unconventional measure was the Fed's preferred tool during the Great Financial Crisis in 2008. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

How does Quantitative Tightening (QT) work, and what does it mean for the US Dollar?

By reversing QE, quantitative tightening (QT) generally supports the US Dollar's value. Under QT, the Federal Reserve halts bond purchases from financial institutions and, as bonds in its portfolio mature, refrains from reinvesting the principal in new bonds.