USD: Third straight cut, shallow cycle signalled

The Fed delivered a third consecutive rate reduction, taking the target range to 3.50–3.75, and kept its projections for one additional cut in 2026. The decision passed by 9–3, with three hawkish dissents against the 25bp move. The message was not as restrictive as some had feared, and the dollar initially weakened on what read as a mildly reflationary set of forecasts. GDP projections were revised higher, with growth in 2025 nudged up to 1.7% and 2026 raised more notably to 2.3%, helped by looser fiscal policy and AI-related investment. At the same time, the Fed’s preferred inflation gauge, PCE, was marked lower, to 2.9% for 2025 and 2.4% for 2026.

Behind Powell’s effort to present a united front, the committee remains clearly split. Two officials formally opposed any cut at all, and a larger group of non-voting policymakers argued that end-2025 rates should be closer to 3.75–4%. These “silent” dissents point to a shallower easing path next year unless the data deteriorates decisively. Even so, markets chose to focus on Powell’s slightly softer tone, with the dollar index closing around 0.4% lower.

Powell noted greater confidence in the inflation outlook than in September, but he stressed that the next move will be data dependent. He highlighted signs of a softer labour market and described inflation pressures as increasingly concentrated in goods, where tariffs remain a key driver, with scope for cooling after Q1 2026. Services inflation is seen easing as wage growth slows in response to weaker labour demand. The Fed also announced plans to buy 40bn dollars of T-Bills over the next month. While essentially a technical step to keep reserves ample, slightly lower money market rates are an incremental negative for the dollar.

From here, scope for additional near term dollar weakness looks limited until next week’s heavy data calendar. With dissenting voices still present on the committee, a clear deterioration in jobs data would be needed to justify further aggressive easing. In the absence of that, the urgency to cut again quickly appears modest. That said, with the main Fed event now behind us, seasonal factors may allow the dollar to drift softer into year end, and DXY could ease towards the 98.00 area.

GBP: Sterling supported as markets fade hawkish Fed risk

GBP/USD moved higher after the decision and is approaching resistance near 1.3390. The scale of the move reflects how much hawkish risk had been priced in relative to the previous two Fed cutting meetings, when the dollar actually strengthened despite back to back reductions. This time, the combination of upgraded growth, lower inflation projections and Powell’s acknowledgment of labour market softness fell short of the very restrictive message some had expected.

In addition, a broader shift earlier in the week towards tighter stances at other central banks had encouraged investors to assume that the Fed would also lean harder against easing expectations. With that high bar not met, the dollar leg weakened and sterling was able to extend gains. For now, sterling’s performance against the dollar will remain heavily driven by US data rather than domestic UK news flow.

EUR: Euro edges higher as key Fed risk passes

EUR/USD also pushed higher and is now close to resistance around 1.17. The removal of the FOMC event risk, together with the softer dollar backdrop, gave the euro room to grind upwards. The move again owes more to the adjustment in US expectations than to any fresh eurozone impulse.

The focus for the euro now turns to how far the dollar leg can extend. If upcoming US data underwhelms, especially in the labour market and inflation prints, EUR/USD could move into the 1.18 area. Conversely, a strong run of data that revalidates the hawkish dissenters on the FOMC would likely cap euro gains and could trigger a partial reversal.

Looking ahead

Attention now shifts to the incoming US numbers that will shape the January decision. Between now and then, markets will receive a heavy flow of releases, including November non farm payrolls next Tuesday and key inflation data, some of which will be affected by delays and distortions linked to the recent government shutdown. Investors will also have to digest several major central bank meetings over the next ten days.

In the near term, we expect price action in USD, GBP and EUR to be driven less by fresh central bank guidance and more by how the data align with the Fed’s softer rhetoric. A meaningful downside surprise in US jobs or inflation would reinforce the current dollar-negative bias and support further gains in EUR/USD towards 1.18 and GBP/USD towards 1.35. Stronger outcomes, particularly in employment, would help the hawkish FOMC camp and could see the dollar retrace part of its recent losses.