Forex Today: US Dollar holds weekly gains as crucial Fed rate decision approaches

Key market developments for Wednesday, 28 October:

Following three consecutive days of gains, the US Dollar (USD) remains firm against its peers early on Wednesday, while the USD Index holds near 102.50 at fresh two-week highs. The Federal Reserve (Fed) is due to deliver its interest rate decision later in the American session, concluding its two-day policy meeting. Fed Chair Kevin Warsh will then discuss the outlook at a press conference.

With the federal funds rate expected to remain in the 3.75%-4% range, markets broadly anticipate no change to the Fed’s policy settings. A modest recovery has left the benchmark 10-year US Treasury bond yield above 5%, while mixed trading in US stock index futures points to a cautious mood.

USD holds firm as AI support continues and Fed attention turns to December

According to OCBC strategists, the US Dollar “was broadly steady overnight as appetite for AI-related risk returned and oil prices eased.” Although they recognise that “the AI tailwind could fade in 2027,” their view is that “it is still too early to position for a weaker USD on an AI downturn.” Their current assessment is that “hawkish Fed risk should keep the USD supported, although the trade is becoming less one-way.”

Turning to monetary policy, OCBC states that “we expect the Federal Reserve to stay on hold in October, with the focus shifting quickly to December.” Further tightening remains a possibility, with the strategists noting that “September CPI surprised to the upside, while most FOMC participants had already indicated that another hike could be appropriate by year-end,” in their assessment.

Contrary to market expectations of a 25 basis points (bps) increase, the Reserve Bank of New Zealand (RBNZ) kept its policy rate at 2.75% during Asian trading hours. Its accompanying statement indicated that future interest rate rises are probable, although these would depend on the economic outlook. NZD/USD faced substantial selling pressure after the RBNZ announcement, with the pair last trading near 0.5600, down 1.3% on the day.

Australia’s Consumer Price Index increased by 4.3% year on year, figures released on Wednesday showed, exceeding the 4.2% market forecast and following August’s 4% rise. AUD/USD retains modest gains on the day near 0.7030, having reached a one-month high above 0.7050 in response to the inflation figures.

USD/CAD trades above 1.4050 early on Wednesday, making slight gains. Ahead of the Bank of Canada’s (BoC) monetary policy announcement later in the day, markets expect the interest rate to rise by 25 bps, from 2.25% to 2.5%.

EUR/USD is retreating towards 1.1100, remaining under pressure following Tuesday’s decline of more than 0.4%.

GBP/USD trades below 1.3300 in Wednesday’s European session, adding to losses recorded over the previous three days.

Gold rebounded by more than 1% on Tuesday in an upward correction. Early on Wednesday, the precious metal is trading within a narrow range around $4,050.

Gold holds above key level as attention turns to Fed meeting

ING strategists report 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.” In their view, the metal is “finding its feet again after the recent correction attracted bargain hunters and physical buyers,” although they also warn that “ETF outflows have recently been a headwind.”

USD/JPY is consolidating above 157.50 following advances on both Monday and Tuesday.