Federal Reserve hikes 25bp, suggests another to come
Lead — The Federal Reserve's recent 25 basis point rate hike, coupled with indications of a potential second hike later this year, suggests a robust stance against inflation as outlined in the commentary. Per the full note, Chair Kevin Warsh's approach reflects confidence in solid economic activity while still acknowledging heightened uncertainty. Market pricing had already anticipated this move based on strong employment and inflation metrics. Current consensus suggests steady targets moving forward, with traders closely monitoring the implications for EUR/USD and GBP/USD.
What the desk is arguing
The desk frames this as a crucial moment for the Fed, where the 25 basis point hike current target range of 3.75–4.00% underscores the urgency of a timely return to the inflation target of 2%. While the Fed projects another hike later this year, the market has largely priced this in already, anticipating heightened volatility in the FX landscape following these developments.
The Fed's resolute approach is highlighted by recent economic data—such as hotter job numbers—that support its rate hike decision. This unanimous decision signifies a clear commitment to fighting inflation, as noted in the commentary, which forecasts rates remaining elevated into 2027. Estimates suggest a potential additional hike could target a peak of 4.125% by year-end, aligning with market expectations.
Where it sits in our coverage
For the EUR/USD pair, our current consensus median target sits at 1.1684 for December 2026, with varied projections ranging between 1.1200 and 1.2000. Notably, socgen projects a range of 1.1400 to 1.2000, while morganstanley has a more optimistic outlook targeting 1.2150.
This desk's perspective aligns closely with the broader consensus, particularly given that the current projections place us within the upper-middle tier of forecast expectations for EUR/USD over the coming months.
How other firms see it
Firms like morganstanley and rbc are aligned in their bullish outlooks for the EUR/USD with targets that suggest potential appreciation. On the contrary, firms such as danskebank and nomura present a more cautious stance, projecting lower values by March 2026.
The interplay between ECB and Fed policies is critical for the EUR/USD trajectory, reflecting their contrasting monetary policy paths as we advance through 2026. Furthermore, the GBP/USD dynamics are similarly influenced by central bank movements, making it paramount to watch both sides as policy shifts unfold.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed raised rates by 25 basis points, aligning with market expectations.
- 02Expectation of one more rate hike before a prolonged hold throughout 2027.
- 03EUR/USD has a current consensus target of 1.1684, reflecting varied market views.
- 04Continued monitoring of labor and inflation metrics is essential for traders.
Market implications
Traders should keep an eye on the 1.1700 level for EUR/USD as it may represent a breakout point following updated Fed guidance. Additionally, upcoming inflation data will further shape market expectations about the Fed's trajectory, especially ahead of the anticipated second rate hike.
Risks to this view
Should inflation metrics significantly soften or job growth unexpectedly decrease, this could prompt a reassessment of the Fed's tightening path and thereby alter market dynamics. Foreign energy flows could also shift the trajectory of inflation forecasts, presenting a risk to current assumptions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
Articles Federal Reserve hikes 25bp, suggests another to come Published 19:44 FX Rates United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The Federal Reserve raised the policy rate 25bp and signalled they may raise rates a second time before a long hold throughout 2027. Nonetheless, we see more labour slack than the Fed and remain a little more optimistic on the inflation backdrop. If we see a resumption of energy flows from the Persian Gulf, the situation would favour a “one and done” outcome James Knightley , Padhraic Garvey, CFA and Francesco Pesole Fed Chair Warsh at today's press conference in which interest rates were raised by 25bp Fed hike to "support a timelier return" of inflation to target The Federal Reserve has hiked rates 25bp to a target range of 3.75–4%, as widely expected.
Markets had moved to swiftly price such an outcome in the wake of Chair Kevin Warsh’s hawkish Jackson Hole address, with subsequent hotter-than-anticipated jobs and core inflation data merely making it a formality. The decision was unanimous and the press release was brief, as it has been after all three decisions under Warsh’s leadership. Economic activity is “solid”, but uncertainty and inflation remain “elevated”.
Nonetheless, today’s decisions will “support a timelier return to the Committee's 2 percent goal”. Fed funds ceiling rate (%) Source: Macrobond, ING "> Source: Macrobond, ING Fed points to one more hike followed by a long hold In terms of the guidance, the central projection within the Fed’s summary of economic projections has one more rate hike this year, in line with market pricing, with the central range holding at 4.125% through 2027. They then have the mid-point of the Fed’s funds target range at 3.875% for 2028 and 3.625% for end-2029 and 3.25% for the “longer run”.
This is a higher profile range than they projected in June, but is below the market pricing of three additional 25bp hikes. Federal Reserve's economic projections Source: Federal Reserve, ING "> Source: Federal Reserve, ING Within the actual dot plot there are only 18 submissions, suggesting Kevin Warsh again declined to offer a view. Only 2 of the 18 FOMC submissions had no further rate hike this year, suggesting strong backing for another move, and similarly, there are only 4 of 18 that expect to see any sort of rate cut next year.
There are 8 of 18 expecting the policy rate mid-point to be 4.375% (2 additional hikes) by end-2027. So this is a more hawkish Fed than in June with them revising up inflation and growth and revising lower unemployment projections despite the data trends suggesting it should be the other way round - in our view. Indeed, our growth, inflation and jobs forecasts suggest little need for further rate hikes, and it may well be that the Fed are striking a hawkish line in order to build more credibility with bond markets as they look to support Treasury efforts to anchor the long end of the curve.
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