FOMC preview: Fed set to hike 25bp in recalibration move
At a Glance
The desk anticipates a 25 basis point Federal Reserve rate hike in September, framed as a necessary recalibration rather than the beginning of a tightening cycle. Supporting this view, recent employment and inflation data have signaled robust economic activity, as highlighted by Chair Kevin Warsh's recent comments emphasizing an inflation focus. Per the full note, August's CPI was reported at 3.4%, with a core CPI increase of 0.29% month-over-month, indicating persistent inflationary pressures. Additionally, this rate hike will be pivotal in shaping market expectations for currency pairs, specifically the USD/JPY and GBP/USD, as traders align positions with the shifting Fed narrative.
Key Takeaways
- 01Anticipation of a 25 basis point rate hike by the Fed in September reflects a growing focus on inflation and employment.
- 02Recent economic data, including a 3.4% CPI and solid job reports, support the Fed's hawkish pivot.
- 03EUR/USD targets show a consensus favoring gradual appreciation, influenced by expected monetary policy shifts.
- 04The USD/JPY and GBP/USD pairs will be sensitive to near-term Fed communications and actions.
Full Analysis
What the desk is arguing
The desk argues that the Federal Reserve is set to execute a 25 basis point rate hike in September, citing increasing inflation and employment metrics as critical indicators. Per the source commentary, Chair Warsh's remarks have shifted expectations from a hold to a hike unless data proves otherwise, highlighting a significant pivot in their approach.
Economic reports have justified this new stance, with the August jobs report exceeding forecasts and inflation remaining above target at 3.4%. This data, coupled with rising oil prices and a seemingly healthy labor market, suggests the Fed feels confident enough to proceed with a rate increase.
Where it sits in our coverage
Current consensus for EUR/USD is at 1.1700, with forecasts from firms like socgen (1.1400), rans (1.1800), and morganstanley (1.2000) spanning a range of 1.1200 to 1.2000 by December 2026.
The desk's narrative aligns closely with the prevailing consensus but leans towards the higher end as expectations shift more favorably towards rate hikes, especially amidst an environment where many firms see potential upside in the euro amid similar ECB policies.
How other firms see it
Firms like hsbc and investec view the prospect of tightening as increasingly likely, sharing the desk's perspective that current conditions merit action from the Fed. In contrast, firms such as scotiabank reflect a more cautious stance on potential future hikes.
Market participants should also monitor the USD/JPY trajectory that is closely linked to Fed actions, as movements in this pair could signal larger shifts across the FX spectrum.
Market Implications
Traders should keep an eye on levels near 1.1700 in EUR/USD and 161.28 in USD/JPY, as these will likely react sharply to the forthcoming Fed announcement. This could lay groundwork for positioning into year-end strategies, especially ahead of expected rate shifts. Positioning signals will also be pivotal as financial markets adjust.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
BNP Paribas | Bearish | 1.1500 |
UBS | Bullish | 1.1800 |
UOB | Bullish | 1.1800 |
From the original
Articles FOMC preview: Fed set to hike 25bp in recalibration move Published 14:39 FX Rates United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download We changed our view to a 25bp Federal Reserve rate hike in September in the wake of Chair Kevin Wa
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4 itemsKevin Warsh navigates a hawkish Fed shift
The desk posits that the changing tone from the Federal Reserve, now led by Kevin Warsh, signals a potential shift toward future rate hikes amidst growing economic momentum and inflationary pressures. As outlined in the source commentary, the Fed Chair seems disinclined to provide explicit forward guidance, which creates uncertainty in market pricing for rate adjustments. The consensus for rate hikes has intensified, with a 25bp increase already priced in for this year, as inflation rates are reported at a three-year high of 4.2%. Per the full note [source], this evolving landscape offers a complex, albeit hawkish, backdrop for major currency pairs like EUR/USD and USD/JPY going into the latter half of the year.
Warsh shift points to an ‘insurance’ Fed hike
Recent commentary from Kevin Warsh at the Jackson Hole Symposium indicates a significant shift in the Federal Reserve's policy posture, moving from a patient rate-holding strategy to a more hawkish stance where a rate hike appears more likely. Per the full note [source], the Fed, driven by persistent inflationary pressures, now prioritizes a preemptive hike to ensure inflation returns to target, which fundamentally alters the analysis surrounding the September decision. The new stance suggests that unless the upcoming labor and inflation data are exceedingly weak, a hike is now the default expectation. Notably, the September 4 jobs report and the September 11 CPI print will be critical data points under this new framework.