FOMC preview: Fed set to hike 25bp in recalibration move
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A reversal of this call could occur if incoming economic data significantly undercuts current inflationary narratives or if unexpected geopolitical events dramatically reshape market dynamics. Additionally, any indications of internal dissent within the Fed regarding the hike could also challenge this outlook.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
Société Générale | Bearish | 1.1400 |
Scotiabank | Bullish | 1.1700 |
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 Warsh’s address at the Jackson Hole symposium. The data since then has justified that decision. Our projections for jobs and inflation suggest no need for a series of hikes James Knightley , Padhraic Garvey, CFA and Chris Turner We expect a 25bp hike on 16 September but think this will be a one-and-done affair Fed hike not the start of a new tightening cycle After sounding hawkish in June and then backtracking somewhat at the July FOMC press conference, Chair Warsh was under pressure to clarify the Federal Reserve’s reaction function under his leadership at Jackson Hole.
He emphasised a focus on inflation, which has been above target for five and a half years, and a sense that financial conditions aren’t tight in an environment of full employment. This suggested we needed to change the way we thought about the September Fed decision. Previously, it was that the Fed would hold unless the data justified a hike.
That changed to the Fed hiking, unless the data justified a pause. August’s jobs report came in hotter than anyone forecast in Bloomberg’s survey of economists and the August CPI report showed headline inflation remains above target at 3.4% while core CPI rose 0.29% month-on-month, nearly double the 0.17% trend rate needed to bring annual inflation down to the 2% target. In an environment where business surveys have hinted at a re-acceleration in economic activity over the summer and where the disruption to shipping out of the Middle East has pushed oil prices above $100/bbl, Chair Warsh’s emphasis on trends rather than individual data points suggests he has made his mind up to propose a hike.
No-one on the FOMC is openly hostile and Treasury Secretary Scott Bessent is likely in favour as he nervously watches longer-dated Treasury yields climb. Even President Trump has seemingly given him a pass, saying "he'll do what he has to do." Ordinarily the assumption is that if the Fed hikes, they don’t just go once. Financial markets are now pricing two and a half further rate hikes after the all-but-assured 16 September move.
However, this time around we think that one and done might be the case. Market and consumer inflation expectations remain in check while consumer confidence is at all-time lows, so we see parallels with the late 1990s cuts in early 1996 before a pause, then one “risk management” hike implemented by Alan Greenspan’s Fed in March '97 before a long pause through late 1998. ING's expectations for Fed forecasts versus the June Summary of Economic Projections Since the Federal Reserve's last forecast update, we saw a weaker than expected 2Q GDP report, a softer trend in job creation, notwithstanding the August surprise, while inflation has shown some encouraging signs of decelerating, even if the year-on-year rate remains above 2%.
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