Top of the Morning: FOMC - Warsh signals a period of watchful thinking
The desk interprets the recent FOMC meeting led by Chairman Kevin Warsh as signaling a cautious stance rather than an aggressive tightening of monetary policy. Per the full note , the inclusion of three hawkish dissents from regional presidents highlights internal divisions, yet the smaller changes in the policy statement suggest a preference for maintaining the status quo. While the market had anticipated a more hawkish shift, the absence of aggressive language may ultimately shape positioning in the USD pairings as traders digest these nuances. With no immediate high-impact events in the calendar, these insights position the FX market for careful monitoring of sentiment shifts.
What the desk is arguing
The desk asserts that the FOMC's recent communication reflects a period of 'watchful thinking' rather than a shift to a more hawkish policy stance. Andrew Dubinsky from UBS emphasized that while there were notable dissents at the meeting, the committee ultimately refrained from altering the overall tone of the statement. This suggests that despite some desire within the committee for tighter policy, there is significant caution regarding the economic outlook.
The presence of three dissents at the meeting—consistent with prior assertions from the regional presidents advocating for hikes—indicates underlying divisions on the committee. However, the unchanged language suggests a reluctance to appear overly aggressive, given current market conditions and uncertainties related to inflation and growth.
Where it sits in our coverage
Our consensus target for USD/EUR is currently set at 1.075, with a range between 1.04 and 1.12. Notable institutional targets include the following: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with jpmorgan's targets at the higher end of the spread, indicating a cautious optimism towards the dollar amid a carefully monitored policy environment.
How other firms see it
Many firms appear aligned with this cautious outlook, particularly jpmorgan, which emphasizes a gradual approach to any potential rate adjustments. Conversely, bofa suggests a more conservative position, advocating for lower targets in response to global economic pressures.
Market pairs like EUR/USD will be critical as they reflect the Fed's stance against other central banks, especially with the ongoing developments in monetary policy. Observers should also note how these dynamics play out in relation to the USD/JPY as a reflection of risk sentiment in broader markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01FOMC remains cautious with minor changes in policy outlook.
- 02Three hawkish dissents reflect internal disagreements.
- 03Market reaction indicates a wait-and-see attitude on rate hikes.
- 04No immediate high-impact events to influence trading direction.
Market implications
Traders should watch the USD/EUR specifically around the 1.075 level as indications of sentiment shifts materialize. Positioning around this level could shift based on evolving interpretations of Fed communications and potential future adjustments to monetary policy.
Risks to this view
A significant change in the upcoming economic data or unforeseen shifts in inflation rates could derail the current projections, leading to more aggressive rate hike expectations that would alter trader sentiment towards the dollar.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Today we are going to spend some time reviewing this week's FOMC meeting, the statement, the policy decision, and of course, the press conference Q&A session with Fed Chairman Kevin Warsh.
Joining me right here in studio at 1285 in Midtown Manhattan, glad to welcome back U.S. economist from the UBS Chief Investment Office, Andrew Dubinsky. Andrew also released a blog on this very topic, which is now available up on ubs.com slash CIO. The title, Warsh signals a period of watchful thinking.
So we'll spend some time today digging into the blog and hearing Andrew's reflections on the meeting. First off, Andrew, great to have you back here in studio. Thank you for dropping by on this Thursday morning.
Oh, yeah. I love to be here in person with you. So I'm looking forward to this.
Definitely. So let's begin simply, Andrew, by hearing your thoughts and reflections on what the statement delivered and what we heard from Chairman Warsh during yesterday's press conference. Yeah.
So I'll break it up into two parts. First, we got the statement and there were little changes except for the notable inclusion of three hawkish dissents going into the meeting. There were a lot of expectations that there could be some dissents.
And we saw that kind of uncertainty also coming in the meeting reflected in the pricing of the July rate forwards. And it was not, I would say, a surprise who dissented. The three regional presidents had dissented in April in a hawkish direction.
And we can infer from their communication that they favored hikes and they were part of the group of people submitting dots having hikes in 2026. So other than that, there was really little changes to the statement. And the news that you could take away from no changes is that there were opportunities to change a statement in a hawkish direction and they opted out of doing that.
So I'd say on net, given who dissented and the lack of changes, it was marginally a dovish surprise. And I think that set up things for the press conference where Warsh didn't really say anything that was notably hawkish. And if anything, if I had to say the themes more aligned in a dovish direction.
It was interesting heading into the policy decision release, the market perhaps suggesting that we would see a rate hike. That, of course, was not the base case of CIO. But the market response to the statement, the Q&A was notable yesterday, especially on the equity side.
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