US
USD recouped some of its post-Fed losses even as 2-year Treasury yields extended its decline. Yesterday, the FOMC paused tightening and kept the Fed funds target range steady at 3.75-4.00%, as was expected. It was a 10-2 vote split, with Fed Governor Lisa D. Cook and Cleveland Fed President Beth M. Hammack dissenting in favor of a 25bps hike.
The initial market reaction to the Fed decision was muted as futures market implied only 10% probability of a hike. Fed Chair Kevin Warsh’s press conference stirred more action.
2-year Treasury yields and USD fell as Warsh signaled little urgency to hike despite stalled progress on inflation. Warsh said “I feel good” about inflation expectations and inflation compensation going the right way, stressing that “quashing inflation is not about some fixed individual date on a calendar.”
Still, Warsh’s patience does not weaken the case for further tightening. He reiterated that inflation remains too high and that the Fed must “ensure that relative price changes in some sectors do not broaden out across the economy.” Warsh also noted that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.” Together, these comments keep a December Fed funds rate hike firmly in play, with 83% odds priced in.
Overall, strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias, keeping rate differentials supportive of USD. Today’s September PCE and Q3 real GDP releases will offer a fresh check on the Fed’s room for patience (both at 12:30pm London, 8:30am New York).
Headline PCE is seen rising 0.5% m/m vs. 0.3% in August and quicken to 3.6% y/y vs. 3.4% in August. Core PCE is expected to rise 0.3% m/m vs. 0.2% in August and quicken to 3.1% y/y vs. 3.0% in August.
Real GDP growth is anticipated to rise 3.2% annualized vs. 2.2% in Q2 driven by consumer spending and AI-related business investment. The Atlanta Fed’s GDPNow and New York Fed GDP Nowcast estimates point to Q3 growth of 3.3% and 2.7%, respectively.
On a side note, Warsh signaled the FOMC schedule will change as of next fall. The FOMC would retain 8 meetings per year, but 1 meeting in 2027 would focus exclusively on broad monetary policy strategy and carry no rate vote or policy statement. Warsh expects 2 such meetings in 2028, effectively reducing scheduled rate decisions to 6 annually.
The change has little immediate market implications. But fewer rate decision dates could mean bigger market moves around each meeting and leave markets more sensitive to data between meetings.
EUROZONE
The ECB is widely expected to pause tightening and keep rates on hold at 2.50% (1:15pm London, 9:15am New York). Contained Eurozone underlying inflation and tighter financial conditions give policymakers scope to wait. Nevertheless, resilient economic activity and inflation projected to remain above target for an extended period back the case for a December rate hike (80% priced in).
France’s bond market turmoil is likely to dominate ECB President Christine Lagarde’s press conference. Reassurance that the ECB stands ready to contain unwarranted contagion can cushion EUR, but France’s fiscal troubles leave EUR/USD vulnerable to a decline toward 1.1000. See here for details.
UK
The UK October 2026 Budget presented yesterday is neutral for GBP and gilts. The government modestly increased fiscal tightening but plans to issue slightly more debt.
The cyclically adjusted primary balance, which excludes interest costs and adjusts for the economic cycle, is projected to improve from a deficit of -0.3% of GDP in 2026/27 to a surplus of +0.5% in 2027/28. This implies a fiscal drag of 0.8% of GDP, up from 0.6% projected in March.
The additional fiscal restraint is probably too modest to materially curb the nearly 125bps of BOE rate hikes implied over the next twelve months. Meanwhile, £250.6 billion of total gilt sales are planned for 2026/27. That’s roughly in line with expectations (around £249.6bn) and up £4.4bn from the £246.2bn planned in April.
CANADA
USD/CAD slipped just under 1.4000, driven mainly by Fed Chair Warsh’s patient tone as the Bank of Canada’s (BOC) hawkish hike played second fiddle. The BOC raised the policy rate 25bps hike to 2.50% due to persistently higher energy prices and the Canadian economy showing resilience. A hike was 80% priced-in by the swaps curve but analysts surveyed by Bloomberg were more divided.
The BOC stressed “there could be a need to increase the policy rate further.” Indeed, the BOC lifted real GDP growth and headline inflation projections across the forecast horizon. What stood out is the BOC sees headline CPI above its 2% target through Q4 2028.
Bottom line: the BOC’s more hawkish stance limits policy divergence with the Fed, opening the door for USD/CAD to retreat toward its 200-day moving average at 1.3887.
