US FX WRAP: Dollar weighs as Fed Chair Warsh abstains from hawkish surprise

The dollar was hit as Fed Chair Warsh's remarks, following the expected decision to hold rates, lacked the hawkish elements needed to support the buck. The decision was met with two hawkish dissenters, Hammack (exp.) and Cook (unexp.), with the Committee noting that "The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee's 2 percent goal". Choppy trade was seen at first on the statement and decision, before USD pressure set in shortly after the press conference as short-end yields began to decline. The move was prompted by a lack of hawkish surprises from Fed Chair Warsh, with markets no longer fully pricing three 25bps hikes by end-2027. Meanwhile, long-end yields rose, likely on the notion that the Fed may be falling behind the curve given the recent hot PPI and CPI readings, as well as Warsh saying he is unwilling and unable to call financial conditions tight (despite supporting a hold); more clarity should come with Thursday's PCE report. At pixel time, DXY trades around 102.13, against early intraday highs of 102.49.

USD/CAD traded lower, helped by post-Fed USD downside, whilst higher Canadian government bond yields provided a supportive backdrop. The rise in yields came in response to the BoC signalling further hikes on top of today's preemptive 25bps hike, aimed at curbing second-round effects and preventing any de-anchoring of inflation expectations. The Governing Council has said any further tightening will proceed carefully given uncertainties, with decisions taken on a meeting-by-meeting basis.

EUR/USD was firmer on the aforementioned USD weakness ahead of tomorrow's ECB announcement, where policymakers are expected to hold rates at 2.50% despite elevated energy prices and inflation concerns.

Sterling was also firmer on the same themes. The UK Autumn Budget showed Chancellor Healey confirming a 3ppt increase in the bank tax surcharge, while the OBR raised its 2027 inflation forecast to 3.4% from 2.0% and lowered GDP growth expectations to 1.0%. The DMO also raised planned gilt issuance to GBP 250.6bln (exp. 249.6bln), although a reduction in long-dated issuance provided some support to gilts.

NZD was the worst G10 performer on the RBNZ's surprise decision to hold rates, catching hawkishly positioned markets off guard. The decision was a narrow 4-3 vote in favour of a hold (money markets had priced a 93% chance of a 25bps hike), with differing views on the weight assigned to various risks and the timing of the monetary policy response, although members agreed on the inflation outlook. The Committee agreed that tighter monetary policy is likely to be required, but that this remains dependent on the economic outlook. NZD/USD hit lows of 0.5580 before recovering some of the losses to 0.5627 on late-session USD weakness.