USD: Looking through the volatile Fed reaction - ING

Markets' initial interpretation of the Fed interest rate cut was firmly dovish: aside from Miran's 50bp dissenting vote, the Dot Plot was revised to show two more cuts this year. The result was a drop in front-end yields and the dollar. However, as Chair Powell started speaking in the press conference, the move was very rapidly inverted: the two-year swap rate climbed above pre-meeting levels, the yield curve steepened, and DXY ended the day with a 0.5% gain and has continued to rally this morning, ING's FX analyst Francesco Pesole notes.

FOMC clearly shifts to a dovish stance

"We think the second move was exacerbated by some 'sell the fact' effect and positioning readjustments. It's telling that about half of the initial dollar drop had been unwound even before the press conference started. Anyway, one of the main triggers appeared to be Powell failing to bring the inflation discussion to the 'transitionary' camp, leaving the assessment of the tariff impact on prices still very much open. Also, his characterisation of this as a 'risk-management cut' might have softened the Dot Plot's dovish message. All in all, if markets were looking for some confirmation that the Fed has lost some independence, Powell seemed to quell it yesterday."

"But regardless of the market's hectic reaction, we read this as a negative event for the dollar. Despite Powell's cautionary tone, the FOMC has clearly shifted to a dovish stance where it sees multiple cuts, and the focus is now firmly on the employment side of the mandate."

"Our call is for two more 25bp cuts this year, and we see the cheapening of the dollar's funding cost as driving more depreciation in an already seasonally weak end of the year for the greenback. We expect the next few days to show the dollar re-softening. Today, the focus will be on jobless claims - which spiked last week - alongside the Leading Index and TIC flows."