Dollar firms after Powell but outlook still soft
US equities put in a strong performance on Thursday, with the S&P 500, Nasdaq 100, Dow Jones and Russell 2000 all closing at record highs together, a rare alignment that signals confidence is spreading beyond mega-cap technology into small-cap names. The move came after a volatile reaction to the Federal Reserve’s decision to cut rates.
Markets initially took the policy statement and revised dot plot as dovish. Short-term yields dropped, the dollar weakened and risk appetite improved. Powell’s press conference, however, shifted sentiment. He described the 25bp reduction as a “risk-management” step, downplayed any case for a larger cut and avoided labelling inflation as “transitory.” Two-year swap rates rebounded, the curve steepened and the DXY not only erased losses but recorded its strongest daily gain in several weeks.
That bounce looks more like a positioning squeeze than a lasting shift. The Fed has clearly turned towards supporting employment, and funding costs are falling, making hedging against dollar strength cheaper. Seasonal headwinds into year-end also favour renewed dollar softness. We still see two further 25bp cuts ahead this year, with a bias for the dollar to drift lower once markets digest Powell’s message.
Meanwhile, the yen topped the G10 after the Bank of Japan signalled a firmer bias, with two members dissenting at its latest meeting, prompting traders to price a higher chance of an October hike.
Euro trims gains after US data
EUR/USD eased 0.2% on Thursday as stronger-than-expected US jobless claims helped the dollar regain ground. The pullback followed a run-up earlier in the week, when the Fed’s expected start to its easing cycle had lifted the pair to new highs near 1.1920.
Risk reversals, a measure of market positioning, had reached their strongest levels since early August ahead of the meeting, reflecting optimism about continued euro strength. Yet some of those bets were pared back after Powell’s press conference prompted a modest repricing in the two-year US OIS curve. Even so, the euro is on course for a modest weekly gain of around 0.3%, and support remains firm above 1.18 as long as US data do not surprise decisively to the upside.
The euro’s advance continues to depend far more on the US narrative than on domestic factors. The ECB has completed its easing cycle and left policy guidance unchanged, meaning the currency’s near-term scope rests largely on how far US yields and the dollar can retreat.
Sterling slips as BoE offers no spark
The pound weakened after the Bank of England’s September meeting delivered no surprises. Bank Rate was held at 4%, with a familiar 7–2 split as two members again backed a small cut. GBP/USD now trades just above 1.35, down from two-month highs above 1.37 earlier in the week.
The BoE confirmed a slower pace of quantitative tightening, trimming its annual target to £70bn and signalling that future sales will focus on shorter gilts to avoid stirring long-end volatility. While sensible, the decision reinforced a cautious tone rather than one supportive of sterling. The minutes offered little new, emphasising a “gradual and careful” approach to policy withdrawal and showing no urgency to ease before next year.
Sterling’s late-session slide reflected what the Bank did not say. With no fresh guidance, traders were left to adjust positions, and sentiment was further dented by disappointing August borrowing figures, which showed public sector net borrowing at £18bn, the largest August print in five years.
