US Dollar stayed flat as Federal Reserve held rates despite two officials voting for a hike

September’s US Personal Consumption Expenditures (PCE) inflation figures and Q3 Gross Domestic Product (GDP) data are now the focus for markets, as the US Dollar (USD) consolidates following the Federal Reserve’s decision to leave interest rates unchanged. Although economic activity remains strong and two policymakers dissented in favour of an immediate rate rise, Fed Chair Kevin Warsh’s caution over the timing of further increases kept the Greenback from building on its recent gains. Strategists at DBS Group Research and Commerzbank are assessing whether resilient growth combined with softer underlying inflation will undermine longer-term rate-rise expectations, or whether monetary tightening in December remains firmly on course.

US Dollar rally faces yield divergence and softer underlying inflation, DBS warns

A weaker Greenback alongside elevated Treasury yields signals that the Federal Reserve’s hawkish pause failed to maintain the currency’s upward momentum, according to Philip Wee at DBS Group Research. Chairman Kevin Warsh declined to confirm a December rate rise, leaving the forthcoming PCE inflation and Q3 GDP releases crucial to the outlook. In Wee’s view, continued economic resilience accompanied by easing underlying inflation could lead markets to reduce their expectations for multiple Fed rate increases in 2027.

"The Fed’s hawkish hold was not enough to sustain the USD’s rally. The divergence between a softer DXY and higher US Treasury yields was particularly noteworthy... Fed Chairman Kevin Warsh’s refusal to affirm a December hike leaves markets reliant on today’s PCE inflation and 3Q26 GDP reports for guidance... September’s headline PCE inflation is expected to increase to 3.6% YoY (0.5% MoM)... Advance estimate for 3Q26 GDP growth is expected to accelerate to an annualised 3.2% QoQ saar... A combination of resilient growth and easing underlying inflation should prompt a reassessment of the multiple 2027 Fed hikes projected by markets."

USD holds steady as December Fed hike odds remain at 85%, Commerzbank says

Markets still assign an 85% probability to a December rate rise, with the US Dollar barely moving after the Fed left rates unchanged despite two votes for an increase, notes Michael Pfister at Commerzbank. Robust growth and labour market figures continue to support the case for further tightening. However, Pfister points out that changes to the structure of FOMC meetings from 2027 will shift the focus of foreign exchange volatility further from central bank announcements towards economic data releases.

"As expected, yesterday’s Federal Reserve meeting did not result in any change to interest rates. However, two votes were cast in favour of a rate hike, including one from Lisa Cook... For the US dollar, therefore, the whole affair was a non-event: there was virtually no movement, and the market continues to price in an interest rate rise of roughly 85% for the December meeting... The meeting became particularly interesting at the outset when Warsh announced that, whilst they intend to stick to eight meetings a year, from 2027 onwards, one of these will be a strategy meeting without an interest rate decision or statement."

US Dollar stalls between near-term rate expectations and longer-term reassessment

The foreign exchange market remains caught between hawkish near-term expectations and a reassessment of the longer-term economic outlook, as illustrated by the US Dollar’s muted reaction to the Federal Reserve’s decision to hold rates. According to Commerzbank, an 85% probability of a December rate rise remains an anchor for near-term Greenback valuations. By contrast, DBS Group Research argues that, should Q3 GDP (3.2% QoQ annualised) confirm robust expansion while core inflation moderates, investors may have to scale back their expectations for Fed rate rises in 2027, temporarily limiting further US Dollar gains.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)