Federal Reserve preview: A pause before a December hike
In anticipation of the upcoming FOMC meeting on October 28, the desk aligns with the expectation that the Federal Reserve will maintain interest rates despite recent inflation pressures. Per the full note from ing-think, Fed officials have indicated a need for more tightening, suggesting a December rate hike is on the horizon. The decision to pause in October reflects broader economic stability despite cooling sectors and mixed job numbers. This aligns with the sentiment across the FX market, where traders are assessing how these decisions will impact pairs like EUR/USD, GBP/USD, and USD/JPY as we approach year-end market dynamics.
What the desk is arguing
The desk takes the position that the Federal Reserve will keep interest rates unchanged at the upcoming October FOMC meeting, positioning itself for a potential rate hike in December. This stems from recent signals from Fed officials who do not appear rushed to adjust monetary policy despite elevated inflation readings.
Key indicators, such as the September core CPI print, which rose 0.3% month-on-month, initially raised expectations for an October hike. However, comments from Fed leadership indicating a preference for caution have tempered these anticipations significantly, suggesting a stable path forward for the time being.
Where it sits in our coverage
Our current consensus for EUR/USD stands at 1.1253, with a target range for March 2026 seen between 1.1200 and 1.2000. Notably, rabobank and nomura have set their March 2026 targets at 1.1759 and 1.1700, respectively.
This view aligns closely with market expectations across firms, with many projecting a muted response until the policy environment shifts post-December; however, our set forecasts are at the upper bound of the current spread, reflecting a cautiously optimistic outlook.
How other firms see it
Several firms such as hsbc and citi also share an outlook supportive of sustained Fed policy into the end of the year, with euro and pound targets that suggest a measured risk approach. Conversely, firms including mufg have differing views, forecasting a more immediate tightening.
Given the correlation between Fed policy expectations and the performance of USD/JPY and GBP/USD, traders should be vigilant for any geopolitical or macroeconomic shifts that might affect these dynamics.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expecting the Federal Reserve to hold rates in October, with potential for a December rate hike.
- 02Recent inflation data has not swayed Fed officials from a cautious approach to monetary policy.
- 03Current consensus for EUR/USD and GBP/USD targets shows a bullish sentiment as 2026 approaches.
- 04Market focus remains on the interplay between US economic data and Fed policy decisions.
Market implications
Watch for deviations from expected Fed guidance as a key market signal. The outcome of the October FOMC meeting could set the stage for December adjustments, particularly impacting USD pairs like EUR/USD and USD/JPY, currently priced at 1.1253 and 155.8160, respectively.
Risks to this view
Any unexpected change in economic indicators or shifts in geopolitical stability could invalidate the current call, particularly if inflation data accelerates further ahead of the October meeting or if job numbers recovery exhibits stronger-than-anticipated results.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bearish | 1.1140 |
TMGM | Neutral | 1.1450 |
MUFG | Neutral | 1.1200 |
Articles Federal Reserve preview: A pause before a December hike Published 14:41 FX Rates Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Despite hot inflation prints in September and the Fed having signalled that further action to tame inflation will likely be needed, markets and economists are united in expecting the central bank to leave interest rates on hold at the 28 October FOMC meeting. Ongoing concerns about elevated price pressures mean we do expect a December interest rate rise James Knightley , Padhraic Garvey, CFA and Chris Turner The Fed looks set to hold rates steady at the October FOMC meeting before hiking again in December Fed officials play for time The immediate reaction to the surprise September 0.3% month-on-month core CPI print was to send the chances of an October rate hike above 50%. But this didn’t last long.
Earlier comments from Federal Reserve Vice Chairs Philip Jefferson and Michelle Bowman and Governor Chris Waller, signalling no rush to decide on the next policy move, quickly calmed markets. The fact that Fed Chair Kevin Warsh subsequently chose not to talk up the chances of action when he spoke at the IMF meetings in Bangkok, unlike at the Jackson Hole Conference before the September hike, further dampened the perceived chances of action. While it is true to say that recent jobs numbers have been disappointing and interest rate-sensitive sectors, such as the housing market, are experiencing increasing pain, the economy is growing robustly, and inflation remains above target.
Fed officials themselves have made it clear that they think more tightening of monetary policy is going to be required to bring inflation to heel. Given that the latest Federal Reserve Summary of Economic Projections showed four FOMC members projecting 50bp of rate hikes between now and the end of the year, the decision is unlikely to be unanimous. Beth Hammack, Neel Kashkari and Lorie Logan all voted to hike in July when the rest of the committee wanted to hold steady.
All three could again dissent in favour of hiking. The press release is likely to be brief, and we also expect another short and snappy press conference from Chair Warsh. He's likely to keep things quite matter-of-fact given his lack of enthusiasm for forward guidance.
We expect his message to be that the economy remains in decent shape, unemployment is low, and inflation is above target. The policy changes being made will be determined by the trends in incoming data, with officials currently thinking that they probably have more work to do. US core consumer price inflation YoY% versus the Fed funds policy rate Source: Macrobond, ING "> Source: Macrobond, ING Looking towards December We will have two jobs reports and one inflation print ahead of the December decision.
Sources & References
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