Fed’s Powell says December cut is not a done deal

Dollar strengthens after Powell tempers rate cut hopes

The US dollar outperformed every other major currency on Wednesday, mainly driven by the FOMC decision yesterday. The greenback stabilized today, or even pulled back against some of its peers, but it extended gains against the yen, which came under pressure following the BoJ decision today.

The Fed cut interest rates by 25bps as broadly expected, with two members dissenting the decision. Governor Stephen Miran again called for a 50bps cut, while Kansas Fed President Jeffrey Schmid voted for no cut given sticky inflation. The Fed highlighted the limited data due to the US government shutdown and decided to end the drawdown of its balance sheet, due to tightening liquidity conditions in money markets.

There was no major reaction at the time of the decision, with the dollar oscillating in a 20-pip range and US stocks holding onto their gains. However, at the press conference following the decision, Fed Chair Powell said that “a further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it, policy is not on a preset course." This added fuel to the dollar’s engines and sent Treasury yields higher.

The probability of a December reduction now stands at around 70%, with investors pencilling in only 60bps worth of additional rate cuts for 2026. With that in mind, should incoming data continue to suggest that inflation remains sticky and that the economy is faring well, more investors may be convinced that there is no need for aggressive rate reductions, and the dollar could extend its latest gains.

Loonie holds well due to BoC, pound falls the most

Ahead of the Fed, the Bank of Canada had already decided to cut interest rates by 25bps as was also expected and signalled that this may be the end of its cutting cycle unless the economic and inflation outlook change materially. The loonie gained on the hawkish decision and was the least wounded after the dollar’s Fed-related offensive.

The pound was the main loser, becoming extra vulnerable after last week’s data revealed softer-than-expected inflation, while the employment report earlier in the month showed that salaries grew at their slowest pace since 2022 and the unemployment rate increased. This gave rise to a 30% probability of a 25bps rate cut at the Bank of England’s upcoming gathering.

BoJ reiterates economic concerns, ECB decision on tap

The yen is today’s main underperformer, dropping after the BoJ held interest rates unchanged as broadly anticipated. Officials reiterated their pledge to continue raising borrowing costs should economic conditions evolve in line with their forecasts. They also upgraded their economic growth forecast for the current fiscal year and revised up their inflation projection for fiscal 2026.

However, policymakers held a magnifying glass over the risks that may hurt Japan’s economic recovery, including the uncertainty surrounding US President Trump’s tariff policies, not allowing investors to ramp up their rate hike bets.  According to Japan’s Overnight Index Swaps (OIS) market, there is only a 26% chance of a hike in December. A quarter-point hike is not fully priced in before April.

The central bank torch will now pass to the ECB, which is expected to remain sidelined. There is no rate cut fully priced in from here onwards, which means that many investors believe that the ECB has done its job. It remains to be seen whether Lagarde and her colleagues will confirm that view, or whether they will keep the door open to another reduction if deemed necessary.

Stocks hit record highs, futures flat even after Trump-Xi deal

On Wall Street, all three of the main indices hit fresh record highs ahead of the Fed decision and pulled back after Powell poured cold water on expectations that a December rate cut is a done deal. That said, the tech-heavy Nasdaq still closed in record territory.

Nvidia CEO Jensen Huang announced that his firm will build seven new supercomputers for the US Department of Energy, with the company’s stock jumping 5% at the time of the announcement. Shares ended up 3% and Nvidia became the first company to cross the $5 trillion valuation mark.

After the closing bell Microsoft and Meta slid in after-hours trading, while Alphabet gained, all following the release of their quarterly results.

Today, stock futures are trading flat even after US President Trump said he and Chinese President Xi found common ground on trade. Trump said that he agreed to trim tariffs on Chinese goods conditional upon China resuming its US soybean purchases, keeping rare earths exports afloat and restricting the illicit trade of fentanyl.