US Dollar: Support holds as upside capped – OCBC

OCBC’s Sim Moh Siong and Christopher Wong note that the Federal Reserve’s pause keeps the Dollar supported but limits sustained upside. They expect a final 25bp hike in December, while underlying inflation and global policy moves, including an ECB hold, shape the outlook. European fiscal and energy risks weigh on the Euro, keeping EUR/USD under pressure.

Fed pause keeps Dollar supported

"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.)