FX Daily: Can France wake up the ECB doves?

USD: Don’t read too much into the softish reaction to the Fed The dollar traded a little softer after the Fed’s hold yesterday, with the USD 2yr swap rate falling around 8bp. As discussed in our review note, the overall message remained hawkish, with Chair Warsh reiterating his firm commitment to price stability, adding that current inflation “remains elevated” while the economy is “expanding at a strong pace”. The modest dovish market reaction was probably due to the lack of clearer guidance towards a December hike, although we’ve now learned not to expect that from Warsh.

On the vote split, Beth Hammack and Lisa Cook’s dissents in favour of a hike were not particularly notable signals in themselves. Cook’s vote is a bit of a surprise, however, given she was considered a more centrist member, and may fuel further ire from the Trump administration, which is still attempting to remove her.

From an FX perspective, the picture for the dollar doesn’t change after this Fed meeting. A December hike remains in play (21bp priced in) and its prospect should prove fairly resilient to a potential oil price decline. We see limited room for bearish follow-through to yesterday’s mild negative USD reaction on the Fed story alone. If anything, some positioning for a softer USD could emerge ahead of next week’s US midterms. Barring that, consolidation of the dollar’s recent gains looks more likely.

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