Federal Reserve poised to keep interest rates unchanged as inflation persists

• Unchanged interest rates are widely anticipated at the US Federal Reserve’s October meeting. 
• A December rate rise remains a strong possibility in market pricing.
• US Dollar volatility could increase as Fed Chair Warsh addresses the press conference.

With its year-end monetary policy outlook in focus, the United States (US) Federal Reserve (Fed) will deliver its Interest Rate Decision on Wednesday, at the conclusion of another crucial meeting that could shed considerable light on the central bank’s policy direction for the remainder of the year.

The broad market consensus is for the Federal Open Market Committee (FOMC) to maintain the policy rate within the 3.75%-4% range after September’s announced increase of 25 basis points (bps).

With the CME FedWatch Tool indicating only about a 9% probability of higher borrowing costs, an unchanged decision is almost entirely priced in. Attention therefore turns to Fed Chair Kevin Warsh’s post-meeting press conference, where his remarks could clarify the interest rate outlook and influence the US Dollar’s (USD) valuation.

At an International Monetary Fund (IMF) event earlier this month, Warsh reaffirmed the commitment to achieving price stability, while saying he did not believe in “pre-judging meetings.” Investors took that remark as grounds to all but rule out an October rate rise. This was despite a stronger-than-expected September US Consumer Price Index (CPI) report, in which annual headline inflation accelerated from 3.4% to 3.7%. 

With a change in rates largely ruled out at the forthcoming meeting, Deutsche Bank economists expect the tone of the Fed’s communication to become the main focus. They observe that “the interest will therefore be in Chair Warsh’s press conference and how the Fed balances still-elevated inflation and solid growth against the recent tightening in financial conditions.” In their assessment, the policy message will be judged by how persuasively the Fed recognises ongoing price pressures and resilient activity, while addressing what tighter market conditions mean for the wider outlook. 

EUR/USD faces Fed decision risk as rate announcement approaches

Wednesday’s Fed announcement will include its Interest Rate Decision alongside the Monetary Policy Statement at 18:00 GMT. Afterwards, Fed Chair Kevin Warsh will hold his press conference from 18:30 GMT.

September’s updated Summary of Economic Projections (SEP) revealed that 12 of 18 officials envisaged one further 25-basis-point (bps) increase this year. Of the other members, four anticipated two increases, while two expected no further rises.

The June dot plot, which sets out policymakers’ interest rate forecasts within the SEP, indicated just a 25 bps rise in 2026. The projections then pointed to a 25 bps reduction in 2027, followed by a further 25 bps cut in 2028.

Only about a 17% probability of the policy rate staying unchanged at year-end is reflected in the CME FedWatch Tool. Such positioning leaves scope for the USD to strengthen again if Warsh departs from his earlier IMF remarks and points towards a December increase on the grounds of persistently elevated inflation. EUR/USD could face selling pressure in the initial response to that scenario. However, the European Central Bank (ECB) is also due to deliver its policy decision on Thursday. Any decline in the pair prompted by a hawkish Fed message could therefore stall ahead of the ECB announcement.

MUFG/BTMU analysts point out that “the final FOMC meeting of the year is not until 9th December,” while observing that “the signs of tightening financial conditions continue to build,” meaning there is “certainly a chance that Fed rate hike expectations for December could ease.” They argue that “the willingness of Warsh to signal the Fed remains on the path highlighted by the dots will be important.” On the currency outlook, MUFG/BTMU add that “in circumstances of tightening financial conditions and bond market volatility in Europe we would assume the Dollar will remain underpinned, and the risks remain skewed to the upside.” 

By contrast, a muted assessment of inflation from Fed Chair Warsh, coupled with no signal of a December rate rise, could weigh on the Greenback against its major peers. Should he reiterate that he will not prejudge the year’s final meeting, investors may hold back from fully pricing in an increase, allowing EUR/USD to move modestly higher. Nevertheless, a substantial improvement in inflation figures or a very weak employment report would probably be needed before market participants rule out that possibility. 

For Commerzbank’s Thu Lan Nguyen, EUR/USD’s recent resilience conceals a less favourable underlying picture for the single currency. She observes that “short-term inflation expectations have risen more strongly in the Euro Area than in the US,” but that “higher inflation expectations are currently not being offset by a corresponding shift in relative interest-rate expectations.” Commerzbank considers this divergence to be something that “is, in principle, a negative signal for the Euro,” because market pricing does not imply enough policy tightening to offset the increase in Euro Area inflation expectations. That could leave the currency exposed to a deterioration in sentiment. 

Turning to the short-term technical picture for EUR/USD, Eren Sengezer, FXStreet European Session Lead Analyst, offers the following assessment:

“The near-term technical outlook for EUR/USD highlights a bearish bias as the pair remains in the lower half of the Bollinger Band on the daily chart and the Relative Strength Index stays well below 40. On the downside, 1.1130-1.1100 (lower limit of the Bollinger Band, static level) aligns as the immediate support level ahead of 1.1000 (psychological level, static level). If this latter support fails, a deeper pullback toward 1.0750 (static level) could be witnessed. If the daily RSI falls into the oversold territory below 30 and EUR/USD stays below the lower limit of the Bollinger Band, investors could wait for a technical correction before committing to an extended decline.”

“Looking north, an interim resistance area could be spotted at 1.1260 - 1.1300 (static level, upper limit of the Bollinger Band). In case the pair manages to stabilize above this region, the 50-day and the 100-day Simple Moving Averages in the 1.1420-1.1440 area could become the next difficult hurdle to clear.”