US Dollar: Upside remains capped despite support holding – OCBC

The Dollar remains supported by the Federal Reserve’s pause, though scope for sustained gains is limited, according to OCBC’s Sim Moh Siong and Christopher Wong. Their outlook factors in underlying inflation and global monetary policy decisions, including an ECB hold, alongside an expected final 25bp hike in December. Fiscal and energy risks in Europe continue to weigh on the Euro, leaving EUR/USD under pressure.

Can the Fed pause sustain Dollar support?

"The FOMC left rates unchanged at 3.75-4.00%, with Lisa Cook and Beth Hammack dissenting in favour of a 25bp hike. The statement upgraded growth to a “strong pace” while acknowledging that inflation remains elevated. The USD softened modestly, with much of the move coming during Fed Chair Kevin Warsh’s press conference."

"Despite a strong economy and sticky inflation, Warsh pushed back against the idea that the economy is running too hot, while stressing that incoming data will determine the next move. Our takeaway is that Warsh remains willing, but not eager, to tighten further. We continue to expect a second and final 25bp hike in December."

"Warsh also announced a change to the Fed’s meeting structure. The FOMC will still meet eight times in 2027, but only seven meetings will include a policy decision, with one reserved for broader strategy discussions. In 2028, that shifts to six policy meetings and two strategy meetings."

"The risk of further Fed tightening should keep the USD supported, but we see limited scope for a sustained dollar rally unless underlying inflation continues to surprise to the upside. After the Fed pause, the Bank of Canada hike and the RBNZ surprise hold, attention now turns to the ECB."

"For the EUR, the balance of risks looks softer. Rising French borrowing costs are tightening financial conditions, while elevated energy prices remain an important headwind for the euro-area outlook. These factors could keep EUR/USD under pressure. That said, USD upside should remain contained rather than one-way, particularly if firmer currency management in China and Japan limits further depreciation in Asian currencies."

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