Two votes for a hike: Why the US Dollar stayed flat as the Federal Reserve held rates

Two votes favoured an immediate rate increase. The US Dollar (USD) nevertheless remains in consolidation following the Federal Reserve’s decision to leave interest rates unchanged, as attention turns squarely to key economic releases. Despite strong economic activity and the two dissenting votes, Fed Chair Kevin Warsh’s caution over the timing of further increases kept the Greenback from building on its recent gains. Ahead of September US Personal Consumption Expenditures (PCE) inflation and Q3 Gross Domestic Product (GDP) figures, institutional strategists at DBS Group Research and Commerzbank are assessing whether resilient growth and softer underlying inflation will undermine longer-term rate-hike pricing, or whether December tightening 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 US Dollar’s upward momentum, cautions Philip Wee at DBS Group Research. Chairman Kevin Warsh declined to confirm a December increase, leaving the forthcoming PCE inflation and Q3 GDP releases crucial to the outlook. In Wee’s view, continued economic resilience combined with easing underlying inflation could lead markets to reduce expectations for multiple Fed rate hikes 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."

85% December Fed hike probability leaves USD little changed, Commerzbank says

Markets still assign an 85% probability to a December rate increase, notes Michael Pfister at Commerzbank. The US Dollar barely reacted when the Fed kept rates unchanged, despite two votes in favour of a hike. Robust growth and labour market data continue to support the case for further tightening. However, Pfister points to structural changes to FOMC meetings from 2027 that will move 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."

2027 rate expectations and the US Dollar outlook

The US Dollar’s muted reaction to the Federal Reserve’s pause reveals a currency market balancing near-term hawkish pricing against a longer-term reassessment of the macroeconomic outlook. According to Commerzbank, the market’s 85% probability of a December rate increase remains an anchor for near-term Greenback valuations. By contrast, DBS Group Research argues that Q3 GDP (3.2% QoQ annualised), if it confirms robust expansion alongside easing core inflation, could force investors to scale back expectations for Fed rate hikes in 2027. That could temporarily limit further US Dollar gains.

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