💲Dollar gains ahead of the FOMC decision

Will the Federal Reserve bow to Donald Trump’s political pressure? 🔎📃

At 7:00 p.m. BST time the FOMC will announce its decision on U.S. interest‑rate levels. The consensus assumes that the Fed will leave rates unchanged, so the market will carefully analyse any hints of a potential pivot toward cuts.

What to expect from the FOMC decision

• The Fed will keep rates unchanged (4.25–4.50%).

• The monetary‑policy statement should remain largely unchanged (solid economic activity, stable labour market, low unemployment, slightly elevated inflation). The Fed may potentially acknowledge that the uncertainty related to tariffs is no longer elevated.

• For the first time in a while the decision will not be unanimous. Christopher Waller has already said he will vote for a 25 bp cut; Michelle Bowman has also signalled openness to a July cut (provided inflationary pressures are limited).

• Powell will likely open the conversation about a September cut, stressing that it will depend on the data (i.e., limited inflationary pressure and/or a deterioration in the U.S. labour market).

U.S. Treasury yields are still moving in a relatively narrow range, indicating that the market expects rates to remain unchanged. Ten‑year yields are essentially where they were at the start of the year after the market unwound its dovish positioning and priced in a Fed pause. Source: XTB Research

What are the possible scenarios?

The base scenario is, of course, that rates stay at 4.25–4.50%. The market currently prices this outcome at 97.9%. However, it is worth noting how many votes favour a 25 bp cut.

Hawkish scenario

• Waller or Bowman back down after the June CPI release or political calculations.
• Markets had assumed dissent; its absence would tighten expectations and lower the probability of a September cut.

The Fed keeps rates at 4.25%–4.50% and all members vote unanimously. This scenario is very unlikely in light of Waller’s and Bowman’s public comments, but if it materialised it would certainly strengthen the dollar and trigger a pull‑back in equities.

Moderate scenario

• Waller and Bowman vote for a 25 bp cut.
• Powell delivers a balanced statement, pointing to a weakening labour market but also to “uncertainty” related to tariffs.
• The market prices in cuts in September and December this year.

Rates remain unchanged, but the Fed sends a clear signal of cuts in the second half of 2025. This scenario is consistent with the Fed’s forecasts and communication and is the most likely, confirmed by recent remarks and minutes.

Dovish scenario

• Other bankers such as Collins, Goolsbee or Kashkari join the doves.
• The market starts to price in three cuts this year—in September, October and December—of 25 bp each.

Interest rates still remain unchanged, but the Fed sends distinctly dovish signals to the market. In such a scenario the market would most likely respond with a weaker dollar, higher stock prices and lower bond yields. This scenario is possible but less likely than the neutral one.

Ultra‑dovish scenario

• The FOMC yields, cutting rates for fear of a slowdown in the labour market.

The Fed decides on a cut, which would mean a majority of votes in favour. This scenario is unlikely; the market prices it at 2.1%. In such a situation the dollar and yields would plunge, while gold and the dollar would rally.

The Dot‑Plot chart after the June FOMC decision showed that two committee members (Bowman and Waller) assume rates in the 3.50–3.75% range by year‑end, five members (including Powell) assume 3.75–4.00%, only Collins assumes one 25 bp cut, and four members foresee no cuts. If members do not materially change their view of the economy, the most likely scenario remains two 25 bp cuts.

EURUSD

After a record losing streak EURUSD is trading between two key zones around which price action has shaped in recent weeks (1.152–1.158). The pair is currently at the lower boundary of the consolidation, and the RSI has been in oversold territory (below 30) since the beginning of the week. Depending on which scenario materialises, heightened volatility should be expected during the decision release and press‑conference hours. It is possible that EURUSD will test the above‑mentioned consolidation ranges.

Source: xStation5