EUROPEAN FX UPDATE: USD a touch firmer as markets brace for today's FOMC announcement

USD: DXY +0.1%; 96.73

• After a session of losses yesterday, DXY is a touch firmer in the run-up to today's FOMC policy announcement. A 25bps rate cut is fully priced, however, there remains an open question on whether there is any dissent in either direction. It is plausible that the likes of Miran, Waller or Bowman back a larger 50bps reduction, whilst some have speculated we could see Goolsbee or Schmid opt to leave rates unchanged. Within the policy statement, focus will be on how the board classifies the labour market (currently "solid") and inflation (currently "somewhat elevated"), and whether the FOMC inserts language regarding further easing. A bulk of the price action at 19:00BST will likely be driven by the SEPs with expectations that the 2025 FFR dot will continue to show two x 25bps cuts this year and for the 2026 dot to show an additional two reductions (currently just one). Note, this would compare to market expectations of 68bps of cuts this year and a total of 147bps of easing by end-2026. Thereafter, attention will shift to Fed Chair Powell's press conference, whereby markets will be attentive to how forthcoming he is over additional near-term easing. Note, as an extra curve ball for the market, President Trump is due to be interviewed on Fox at 20:00BST. DXY sits towards the lower end of yesterday's 96.55-97.38 range.

EUR: EUR/USD -0.2%; 1.1845

• EUR is a touch softer vs. the USD after hitting a multi-year high yesterday @ 1.1878. Incremental EUR drivers are lacking with final Y/Y HICP revised a touch lower to 2.0% from 2.1% and the latest ECB wage tracker (2025 wage growth seen at 3.158% vs. prev. forecast 3.152%) passing with little in the way of fanfare. On the former, the ECB observed that early signs suggest lower and more stable wage pressures in H1 2026. Near-term direction for the pair is likely to be provided by the FOMC policy announcement later today. Note, ECB's Nagel is due to speak @ 18:00BST. If EUR/USD continues its ascent higher, ING suggests that 1.1910 "looks like the final resistance level before 1.20 is hit."

JPY: USD/JPY -0.1%; 146.39

• The Yen is fractionally firmer vs. the USD, extending its winning streak to a third session. Overnight, Japanese trade data saw a smaller-than-expected deficit thanks to a smaller-than-forecast contraction in exports. Following the data, Pantheon Macroeconomics stated it expects the 15% universal duty on Japanese goods, imposed by the US to "weigh on Japanese exports for the rest of the year". Attention is slowly turning towards Friday's BoJ policy announcement, which is widely expected to see policymakers stand pat on policy as domestic political uncertainty ties the Bank's hands, for now. As it stands, markets price 15bps of tightening by year-end. USD/JPY hit a fresh low for the month overnight @ 146.22 before picking up to levels north of 146.50.

GBP: GBP/USD U/C; 1.3642

• GBP was largely unreactive to the latest UK inflation data, which saw August Y/Y headline CPI hold steady at 3.8%, as expected. Core declined to 3.6% from 3.8% (in-line with consensus) and services declined to 4.7% from 5.0% (exp. 4.8%). Of concern for the BoE, food price inflation climbed for the fifth consecutive month. Neither this or yesterday's jobs data will have any follow-through into tomorrow's BoE policy announcement, which is unanimously expected to see policymakers stand pat on rates ahead of an expected uptick in inflation next month. The decision to do so will likely be accompanied with some dovish dissent as markets forecast the vote split at 7-2. Of potentially greater interest will be the MPC’s announcement on QT. On which, consensus looks for policymakers to slow QT to GBP 70bln per annum from October (vs. prev. GBP 100bln). This could have implications for the UK's fiscal picture, which remains perilous with the latest reporting suggesting the OBR told UK Chancellor Reeves that it will downgrade productivity forecasts for the UK economy. Cable is currently contained within yesterday's 1.3598-1.3672.

Antipodeans: AUD/USD -0.2%; 0.6667. NZD/USD -0.3%; 0.5967

• Both are softer vs. the USD and at the bottom of the G10 leaderboard with fresh macro drivers from Australia and New Zealand lacking. AUD/USD briefly hit a fresh YTD high overnight @ 0.6689 before returning within yesterday's 0.6660-88 range. NZD/USD is contained within yesterday's 0.5955-91 parameters.

CAD: USD/CAD +0.1%; 1.3756

• CAD is a touch weaker vs. the USD ahead of the BoC rate decision, which is expected to see the Bank cut rates by 25bps, according to 25/32 surveyed by Reuters. Markets assign a 92% chance of such an outcome and an 8% chance of a larger 50bps reduction. A 25bps outturn would see rates slip below the current midpoint of the BoC's neutral estimate. The decision to ease policy further follows recent soft growth and labour market data as tariffs continue to weigh on the economy. Additionally, the latest inflation report was softer than expected on the headline, but core measures remained elevated. Looking beyond today's announcement, markets see a roughly 96% chance of another cut by year-end. USD/CAD currently sits around the middle of yesterday's 1.3734-85 range and below its 50DMA @ 1.3770.

17 Sep 2025 - 10:15- ForexEU Research- Source: Newsquawk