FOMC Underdelivered On Market Expectations - Dollar Offered

OVERVIEW : Wednesday, July 29th, 26’

Markets turned more defensive as geopolitical tensions escalated, with Iran launching missiles at a US base in Jordan, while the US and Saudi Arabia reportedly carried out strikes on Iranian-backed militia targets in Iraq. Oil prices climbed sharply, with crude hitting fresh intraday highs after the IRGC said it had seized three tankers in the Strait of Hormuz and Trump warned that the US would continue hitting Iran hard. The uncertainty around Hormuz remained elevated, with Iran claiming control over the eastern strait while negotiations continued around a potential coordination framework. The FOMC held rates at 3.50–3.75% as expected, although the 9-3 vote split, with Hammack, Logan and Kashkari dissenting in favour of a 25bp hike, initially reinforced the hawkish backdrop. The reaction was ultimately dovish, however, as markets unwound part of the roughly 33% hike probability priced ahead of the meeting. Warsh provided no forward guidance, while stressing the 2% inflation target and noting that the July decision was not driven heavily by June core CPI. Equities came under pressure as long-end Treasury yields rallied post-Fed, adding to the broader risk-off tone. Attention now turns to the dissenters' commentary, with inflation likely to remain the key focus.

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US DOLLAR

USD was sold on the day as the FOMC meeting failed to meet hawkish expectations. The Fed held rates at 3.50–3.75% as expected, with the 9-3 split initially reinforcing the hawkish backdrop as Hammack, Logan and Kashkari dissented for a 25bp hike. However, the reaction turned dovish as markets unwound part of the roughly 33% hike probability priced ahead of the meeting. The statement was largely unchanged with no forward guidance, while Warsh reiterated the 2% inflation target and stressed the importance of broader inflation trends. The Dollar remained under pressure despite escalating geopolitical tensions and higher oil prices, while long-end Treasury yields rallied post-Fed and equities came under pressure.

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EURO

EUR caught a bid on the day amid broad USD weakness, with the single currency also finding some support from a slightly more hawkish ECB tone. ECB's Patsalides said rising inflation risks are shifting the balance towards pre-emptive action, while the latest ECB Wage Tracker showed a modest pickup in annual wage growth.

Data:

  • German Import Prices MoM (Jun) M/M -0.7% vs. Exp. -0.8% (Prev. 0.7%).
  • German Import Prices YoY (Jun) Y/Y 6.1% vs. Exp. 6.0% (Prev. 6.8%).


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GREAT BRITISH POUND

GBP remained supported on the day and firmed into the close, with broad USD weakness providing the main tailwind for Sterling.

Data:

  • UK M4 Money Supply MoM (Jun) M/M 0.8% vs. Exp. 0.2% (Prev. 0.1%).


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AUSTRALIAN DOLLAR

AUD sold off throughout the day as softer-than-expected Australian inflation unwound part of the hawkish RBA repricing built up after Bullock’s comments. Q2 CPI eased to 3.9% Y/Y versus 4.1% expected, while trimmed mean inflation also undershot expectations. The move was further pressured by Westpac shifting to an RBA hold through 2026, removing expectations for an August hike.

Data:

  • Australian CPI QQ (Q2) 0.6% vs. Exp. 0.7% (Prev. 1.4%)
  • Australian CPI YY (Q2) 3.9% vs. Exp. 4.1% (Prev. 4.1%)
  • Australian RBA Trimmed Mean CPI QQ (Q2) 0.8% vs. Exp. 0.9% (Prev. 0.8%)
  • Australian RBA Trimmed Mean CPI YY (Q2) 3.6% vs. Exp. 3.7% (Prev. 3.5%)
  • Australian CPI YY (Jun) 3.8% vs. Exp. 4.1% (Prev. 4.0%)
  • Australian RBA Trimmed Mean CPI YY (Jun) 3.6% vs. Exp. 3.7% (Prev. 3.6%)


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CANADIAN DOLLAR

CAD was supported on the margin as oil prices rebounded on the day, providing the main tailwind for the Loonie. BoC minutes noted that some members remained divided over the sustainability of the economic rebound.

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NEW ZEALAND DOLLAR

NZD had choppy price action but ultimately sold off post-FOMC as equities came under pressure and long-end US yields rallied, weighing on the Kiwi into the close.


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JAPANESE YEN

JPY was marginally supported into the FOMC, but the move faded as the session progressed, with the Yen ultimately closing flat on the day.

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SWISS FRANC

CHF caught safe-haven demand into the close post-FOMC as US long-end yields rallied, with the defensive tone supporting the Franc despite higher US yields.