The Fed’s hawkish hold was not enough to sustain the USD’s rally. The divergence between a softer DXY and higher US Treasury yields was particularly noteworthy. The FOMC statement retained a hawkish bias, with two dissent votes favouring a rate hike, an upgrade in the assessment of economic activity from “strong” to “solid”, continued acknowledgment that inflation remained elevated, and a reaffirmation of the determination to restore price stability.
However, Fed Chair Kevin Warsh’s press conference tempered the hawkishness. He noted an overwhelming consensus among FOMC members that the “monetary medicine is starting to work”, with tighter financial and credit conditions following September’s hike. He also highlighted that inflation compensation, as measured by swaps, and broader inflation expectations "have gone in the right direction". Notably, Warsh devoted considerable time to his proposal to reduce the number of scheduled FOMC meetings from eight to six annually by 2028.
Fed Chairman Kevin Warsh’s refusal to affirm a December hike leaves markets reliant on today’s PCE inflation and 3Q26 GDP reports for guidance. Although the headline numbers are likely to be higher, markets may scrutinise the underlying composition of inflation and growth. For PCE, the key question is whether underlying inflation pressures are moderating despite headline inflation from energy prices. For GDP, attention should focus on consumer spending rather than AI-related business investment. A combination of resilient growth and easing underlying inflation should prompt a reassessment of the multiple 2027 Fed hikes projected by markets. September’s headline PCE inflation is expected to increase to 3.6% YoY (0.5% MoM) from 3.4% YoY (0.3% MoM) in August, with core inflation increasing less by 3.1% YoY (0.3% MoM) from 3.0% YoY (0.2% MoM). Advance estimate for 3Q26 GDP growth is expected to accelerate to an annualised 3.2% QoQ saar from 2.2% in 2Q26, while personal consumption expenditure is anticipated to slow to 3.4% from 3.8%.
With the FOMC behind us, attention shifts to whether the other central banks can sustain their own tightening bias. For example, NZD/USD declined by 1% to 0.5626 on October 28 when the Reserve Bank of New Zealand surprised markets by holding its official cash rate at 2.75%. In contrast, the CAD appreciated by 0.4%, pushing USD/CAD down to 1.3995 overnight after the Bank of Canada delivered the expected 25-bps hike to 2.50%. USD/CAD could extend its decline below 1.40 if incoming Canadian data reinforces the BOC’s guidance for further tightening.
Today, the European Central Bank is likely to leave its deposit facility rate unchanged at 2.50%, while keeping the door open for a December hike. The ECB is likely to seize the breathing space afforded by Moody’s affirmation of France’s Aa3 sovereign debt rating to prioritise the return of inflation to its 2% target. ECB President Christine Lagarde will need to reinforce the ECB’s inflation-fighting credentials without appearing complacent about France’s fiscal vulnerabilities. A balanced message should help stabilize EUR/USD within this month’s 1.11-1.13 trading range.
Similarly, GBP/USD should remain supported within its 1.33-1.34 range, with the UK Autumn Budget providing fiscal assurance and giving the Bank of England the latitude to deliver the expected 25-bps hike to 1.00% on November 5. Friday’s Bank of Japan meeting should provide another test for monetary policy divergence. BOJ Governor Kazuo Ueda could cap USD/JPY within this month’s 156-159 range by reinforcing expectations for a December hike after today’s expected pause and steering the policy bias towards containing rather than generating inflation.
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if the applicable assets fall within the definition of 'financial instruments' that are set out in Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.