USD

The dollar firmed on Wednesday evening following the Federal Reserve’s latest interest rate decision, which saw US interest rates increased to their highest level since 2008.

As widely expected, the Fed voted unanimously to increase interest rates by 75 basis points for the fourth consecutive meeting lifting the US interest rate to a range of 3.75% – 4%.

The dollar initially weakened on the prospect of a dovish tilt following the rate decision as the Fed hinted that the time to slow its pace of tightening may be on the horizon and that further hikes to tackle inflation may happen in small increments. The accompanying statement included that the bank would also take into account the cumulative effect of the hikes that have already taken place when determining policy moving forward.

Dollar weakness was short-lived as Fed Chair Jerome Powell used the press conference as an opportunity to reaffirm his commitment to tackling inflation. Whilst acknowledging that the central bank may entertain the possibility of adopting a less aggressive increase at the next policy meeting in December, Powell warned that the Fed had “some way to go” in its fight against inflation. He added that members need to see “inflation coming down decisively and good evidence of that would be a series of down monthly readings”.

Crucially, Powell disappointed investors hoping for a dovish pivot stating it was “premature” to think about pausing rate hikes adding that the “ultimate level of rates will be higher than previously expected”. As a result, markets are now pricing in US rate hike expectations to move past the 5% level currently priced into markets. Consequently the dollar has rallied against the majority of its peers with a 2% appreciation against Sterling and the euro.

All eyes will now turn to the Bank of England interest rate decision at midday.

Key announcements

08:05 – EUR – ECB President Lagarde speaks

12:00 – GBP – Bank of England rate decision

12:30 – GBP – Governor Bailey’s speech

14:00 – USD – ISM Services PMI expected 55.5