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

Wednesday, 28 October: the key market developments

The US Dollar (USD) Index is near 102.50. Following three consecutive daily advances, the index is holding at fresh two-week highs, while the currency remains firm against its peers early Wednesday. The Federal Reserve (Fed) concludes its two-day policy meeting with an interest rate announcement later in the American session. Fed Chair Kevin Warsh will then discuss the outlook at a press conference.

An unchanged federal funds rate range of 3.75%-4% is the broad market expectation for the Fed decision. After a modest recovery, the benchmark 10-year US Treasury bond yield remains above 5%. Mixed trading in US stock index futures signals caution.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

USD: AI support holds as Fed attention turns to December

A return of demand for AI-related risk and softer oil prices left the US Dollar broadly stable overnight, according to strategists at OCBC. They report that it “was broadly steady overnight as appetite for AI-related risk returned and oil prices eased.” While acknowledging 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.”

December is set to become the policy focus, according to OCBC, which says “we expect the Federal Reserve to stay on hold in October, with the focus shifting quickly to December.” Further tightening remains a possibility. The strategists point out that “September CPI surprised to the upside, while most FOMC participants had already indicated that another hike could be appropriate by year-end,” supporting that prospect.

A policy rate hold at 2.75% was announced by the Reserve Bank of New Zealand (RBNZ) during Asian trading, contrary to market expectations for a 25 basis points (bps) increase. Its policy statement indicated that future rate rises are probable, but remain dependent on the economic outlook. NZD/USD faced intense selling pressure after the RBNZ announcement, with the latest quote near 0.5600 representing a 1.3% decline on the day.

Annual Consumer Price Index growth in Australia reached 4.3%, Wednesday's data showed. That exceeded the 4.2% market forecast and followed August's 4% increase. AUD/USD retains modest gains on 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 after a slight rise early Wednesday. Later in the day, the Bank of Canada (BoC) is also due to deliver its monetary policy decision. Markets anticipate a 25 bps rate increase, taking the rate from 2.25% to 2.5%.

EUR/USD is moving down towards 1.1100, remaining under pressure after Tuesday's loss of more than 0.4%.

GBP/USD trades below 1.3300 in Wednesday's European session. The pair is adding to its decline after three consecutive daily losses.

Gold is trading in a narrow range around $4,050 early Wednesday. This follows an upward correction on Tuesday, when the metal rose more than 1% on the day.

$4,000 reclaimed: Gold stabilises ahead of Fed meeting

With attention turning to the Fed meeting, ING strategists say 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 flagging that “ETF outflows have recently been a headwind.”

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

Fed questions answered

The Federal Reserve: what is its role and how does it affect the US Dollar?

The Federal Reserve (Fed) sets US monetary policy with a dual mandate: stable prices and full employment. Adjusting interest rates is its main means of pursuing these objectives. If prices climb too rapidly and inflation exceeds the Fed's 2% target, the central bank raises rates. Higher borrowing costs across the economy make the US more attractive to international investors seeking to place their funds, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut rates to stimulate borrowing. This puts pressure on the Greenback.

Eight meetings a year: how is Fed policy decided?

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

Quantitative Easing (QE): how does it work and affect USD?

When conditions become extreme, the Federal Reserve may turn to Quantitative Easing (QE), a policy that sharply expands credit flows through a stalled financial system. This unconventional measure is deployed during crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed's preferred policy tool. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions. The US Dollar typically weakens as a result.

Quantitative Tightening (QT): what does it mean for the US Dollar?

Reversing QE, Quantitative Tightening (QT) involves the Federal Reserve ending bond purchases from financial institutions. It also stops reinvesting the principal repaid on maturing bonds in its portfolio into new bonds. This process generally supports the value of the US Dollar.