Forex Today: US Dollar consolidates weekly gains ahead of all-important Fed rate call
Here is what you need to know on Wednesday, October 28:
The US Dollar (USD) stays resilient against its peers early Wednesday, with the USD Index holding at fresh two-week highs near 102.50 after posting gains for three consecutive days. Later in the American session, the Federal Reserve (Fed) will announce its interest rate decision following the two-day policy meeting and Fed Chair Kevin Warsh will comment on the outlook at a press conference.
Markets widely expect the Fed to keep the policy settings unchanged, with the federal funds rate holding steady at the range of 3.75%-4%. The benchmark 10-year US Treasury bond yield stays above 5% following a modest rebound and US stock index futures trade mixed, reflecting a cautious stance.
USD steadies as AI tailwind persists and Fed focus shifts to December
Strategists at OCBC note that the US Dollar “was broadly steady overnight as appetite for AI-related risk returned and oil prices eased.” They acknowledge that “the AI tailwind could fade in 2027,” but argue that “it is still too early to position for a weaker USD on an AI downturn.” For now, they judge that “hawkish Fed risk should keep the USD supported, although the trade is becoming less one-way.”
On policy, OCBC says “we expect the Federal Reserve to stay on hold in October, with the focus shifting quickly to December.” They highlight that “September CPI surprised to the upside, while most FOMC participants had already indicated that another hike could be appropriate by year-end,” keeping the prospect of further tightening in play.
During the Asian trading hours, the Reserve Bank of New Zealand (RBNZ) announced that it left the policy rate unchanged at 2.75%, against the market expectation for a 25 basis points (bps) hike. In the policy statement, the RBNZ noted that interest rate increases are probable in the future but added that they depend on the economic outlook. NZD/USD came under heavy bearish pressure following the RBNZ event and was last seen losing 1.3% on the day near 0.5600.
The data from Australia showed on Wednesday that the Consumer Price Index rose by 4.3% on a yearly basis. This print followed the 4% increase recorded in August and came in above the market expectation of 4.2%. AUD/USD clings to moderate daily gains near 0.7030 after rising to its highest level in a month above 0.7050 following the inflation data.
USD/CAD edges higher early Wednesday and trades above 1.4050. The Bank of Canada (BoC) will also announce monetary policy decisions later in the day and markets forecast a 25 bps increase in the interest rate to 2.5% from 2.25%.
EUR/USD stays on the back foot after losing more than 0.4% on Tuesday and declines toward 1.1100.
GBP/USD extends its slide and trades below 1.3300 in the European session on Wednesday, following a three-day losing streak.
Gold corrected higher on Tuesday and gained more than 1% on a daily basis. The precious metal fluctuates in a tight range at around $4,050 early Wednesday.
Gold steadies above key threshold as Fed meeting comes into focus
Strategists at ING note that 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 add that the metal is “finding its feet again after the recent correction attracted bargain hunters and physical buyers,” even as they caution that “ETF outflows have recently been a headwind.”
USD/JPY stays in a consolidation phase above 157.50 after posting gains on Monday and Tuesday.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.