18/09/2025 Market Watch

Dollar Rebound Sets Stage for BoE Decision

Key Takeaways:

  • Fed cut rates by 25bp to 4.00–4.25%, projecting three more cuts in 2025.
  • Bank of England is expected to hold at 4.00% today, with markets watching QT guidance
  • Bank of Canada also cut by 25bp, leaving room for further easing
  • Dollar volatility surged, but focus now shifts to upcoming U.S. data and the BoE
  • Weak data from New Zealand and Australia increased expectations for deeper RBNZ and RBA easing.

The Federal Reserve delivered a 25bp cut yesterday, lowering the policy range to 4.00–4.25%. The decision matched expectations, though board member Miran dissented in favor of a deeper 50bp move. Updated projections showed a more dovish rate path, including three cuts in 2025, but stronger GDP and inflation forecasts tempered the outlook. Chair Powell framed the cut as a risk-management step and warned against reading too much into the dot plot. Markets initially sold the dollar, but a sharp rebound followed as his tone was judged less dovish than anticipated. Yields climbed and risk assets retreated as volatility surged.

The Bank of England takes center stage today. Policymakers are widely expected to hold rates steady at 4.00%. Attention will focus on the minutes and forward guidance, particularly regarding quantitative tightening. Inflation remains nearly double the 2% target, and wage growth is still firm, leaving policymakers cautious. A November cut remains uncertain, with Governor Bailey stressing the need for patience.

The Bank of Canada resumed easing with a 25bp cut after three consecutive holds. Governor Macklem noted that further reductions remain possible, dependent on incoming data. USDCAD rose as speculative flows favored fresh short positioning in the currency.

In Asia-Pacific, sentiment weakened as New Zealand’s GDP contracted far more than expected, heightening calls for the RBNZ to accelerate easing. Australia’s labor market softened, raising the likelihood of a November RBA cut. Regional currencies lagged, with the Kiwi and Aussie under pressure, while the dollar, Canadian dollar, and sterling outperformed.

Equities and bonds reflected the volatility. Wall Street retreated from record highs, gold eased, and U.S. 10-year yields briefly dipped under 4% before rebounding. The dollar’s recovery suggests short-term selling pressure may have passed, but its trajectory will depend on whether U.S. data align with the Fed’s upbeat growth and employment forecasts.

United States of America

Overview

The Federal Reserve cut rates by 25bp, but the market reaction was mixed. Initial moves saw the dollar and yields fall, while gold surged to record highs. This quickly reversed as Chair Powell’s press conference was interpreted as less dovish than expected, with the dollar rebounding, 10-year yields recovering after briefly slipping below 4%, and gold retreating.

Powell described the decision as a matter of “risk management,” emphasizing that policy was now closer to neutral rather than the start of an aggressive easing cycle. His tone suggested flexibility but not a rush toward deeper cuts. Markets read this as a signal that easing will proceed cautiously.

The vote reinforced that stance. Only newly confirmed Governor Miran dissented in favor of a 50bp cut, while even typically dovish members Waller and Bowman supported the smaller move. The dot plot pointed to two more cuts this year, but only one each in 2026 and 2027, indicating a shallow path for policy.

Growth forecasts were revised higher, with GDP now expected at 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027. The unemployment rate projection was slightly lowered, reflecting expectations of continued labor market resilience. Inflation projections were raised, with 2026 core PCE now at 2.6% versus 2.4% previously, underlining concern that price pressures could linger.

Despite Powell’s cautious framing, the broader stance still represents a shift toward easing. Markets appear to have overshot in their immediate reaction, but dollar softness is likely to return in the coming days as the focus shifts back to labor data and the Fed’s dual mandate.

Economic Drivers

  • Fed policy shift to easing, though framed as risk management rather than aggressive accommodation.
  • Growth projections revised higher, reinforcing confidence in U.S. economic momentum.
  • Labor market expected to remain resilient, with unemployment forecasts adjusted slightly lower.
  • Inflation pressures seen persisting longer, with higher 2026 core PCE forecast.
  • Market positioning and profit-taking exacerbated volatility in the dollar and yields.

Data and Events

  1. 18 September 2025: Federal Funds Rate
  2. 18 September 2025: FOMC Economic Projections
  3. 18 September 2025: FOMC Statement
  4. 18 September 2025: FOMC Press Conference
  5. 18 September 2025: Unemployment Claims

Price Action

  • Initial dollar weakness reversed during Powell’s press conference, with DXY ending the day up 0.5%.
  • Treasury yields recovered, with the 2-year swap rate climbing above pre-meeting levels and the yield curve steepening.
  • Gold retreated from record highs as dollar strength re-emerged.

Key Points:

  • The Fed cut rates by 25bp, but Powell stressed caution and flexibility.
  • Growth and inflation forecasts were revised higher, limiting scope for deeper easing.
  • Markets reversed their dovish reaction, with the dollar rebounding strongly.
  • The Fed still projects two more cuts this year, keeping the easing bias intact.
  • Focus now shifts to U.S. jobless claims and leading indicators for near-term direction.

Australia & New Zealand

Overview

New Zealand’s economy contracted sharply in Q2, with GDP falling -0.9% qoq compared with expectations of -0.3% qoq. This marked the third decline in the past five quarters, highlighting growing structural headwinds. The downturn was broad-based, with 10 of 16 industries contracting. Manufacturing was the largest drag, falling -3.5%, followed by construction at -1.8%. Goods-producing industries declined -2.3% and primary industries dropped -0.7%, while services were flat. The depth and breadth of weakness reinforced expectations for a more aggressive easing cycle from the RBNZ.

Markets have quickly adjusted their outlook, with major banks now projecting a 50bp cut in October followed by a 25bp cut in November. This would bring the OCR down to 2.25% by year-end, compared with the current 3.00%. The New Zealand Dollar sold off heavily on the release, with traders eyeing further downside if weakness persists.

In Australia, labor market data confirmed cracks emerging in August. Total employment fell -5.4k versus expectations of a 21.2k increase, with a sharp drop of -40.9k in full-time jobs only partly offset by a rise of 35.5k in part-time employment. Hours worked also fell -0.4% mom, pointing to slowing labor demand. The unemployment rate held steady at 4.2%, but the participation rate slipped to 66.8% from 67.0%, showing underlying softening. These dynamics strengthen the case for the RBA to consider a cut later this year.

Economic Drivers

  • Deep contraction in New Zealand GDP across key sectors, particularly manufacturing and construction.
  • Growing expectation of an accelerated RBNZ easing cycle to counter broad-based economic weakness.
  • Australian labor market under pressure, with a drop in full-time jobs and weaker hours worked.
  • Declining participation rate in Australia, signaling softer labor demand despite stable unemployment.
  • Regional economies facing rising headwinds, adding pressure on central banks to ease policy.

Data and Events

  1. 18 September 2025: GDP (NZD)
  2. 18 September 2025: Employment Change
  3. 18 September 2025: Unemployment Rate

Price Action

  • New Zealand Dollar sold off sharply after GDP data, with NZD/USD under pressure near key support levels.
  • Market focus remains on whether NZD/USD breaks through 0.5913, opening further downside potential.
  • Australian Dollar weakened moderately following labor market disappointment, reflecting increased RBA cut expectations.

Key Points:

  • New Zealand posted a deeper-than-expected GDP contraction of -0.9% qoq in Q2.
  • RBNZ now expected to deliver 75bp in cuts by year-end, lowering OCR to 2.25%.
  • Australian jobs data revealed weakness, with full-time employment dropping heavily.
  • Participation rate decline points to softening labor conditions in Australia.
  • Regional currencies remain pressured as markets price in more central bank easing.

United Kingdom

Overview

The Bank of England is expected to keep interest rates unchanged today after delivering a hawkish cut in August. Markets are not pricing in any chance of a move at this meeting, but the November decision remains uncertain. Attention will focus on the tone of forward guidance, the vote split, and the outcome of the quantitative tightening announcement.

No major changes in forward guidance are anticipated. The BoE has consistently emphasized a gradual and cautious approach to easing, and recent data do not suggest a pivot toward stronger directional guidance. As a result, markets will likely place greater weight on the vote split. A 6-3 outcome is expected, with Dhingra, Taylor, and Ramsden voting for a cut. While this would lean dovish, it is unlikely to cause a sharp repricing without further confirmation from economic data.

The most significant impact may come from the QT announcement. The central bank is expected to slow its annual gilt reduction target to around £75bn, in line with market expectations. A shift toward reducing younger maturities may also be considered to relieve pressure on the long end of the gilt curve, where volatility has been most evident. However, any downside surprises on QT could trigger gilt sell-offs, with spillovers into sterling performance.

Economic Drivers

  • BoE expected to maintain a cautious stance, holding rates steady for now.
  • Markets remain divided over the November decision, with the outcome tied to upcoming data.
  • A 6-3 vote split is anticipated, which would be viewed as modestly dovish.
  • Quantitative tightening adjustments carry significant market implications, particularly regarding gilt curve stability.
  • Inflation pressures remain elevated, keeping policymakers cautious about easing too quickly.

Data and Events

  1. 18 September 2025: Monetary Policy Summary
  2. 18 September 2025: MPC Official Bank Rate Votes
  3. 18 September 2025: Official Bank Rate

Price Action

  • Sterling remains supported ahead of the decision, with EUR/GBP expected to hold a firm tone into November events.
  • Gilt curve volatility remains a key focus, especially at the long end, where policy decisions could amplify moves.
  • Market positioning reflects little expectation of a cut today, keeping GBP stable in the short term.

Key Points:

  • BoE is set to hold rates after August’s hawkish cut.
  • A 6-3 vote split would highlight cautious dovish leanings.
  • QT announcement could deliver the largest market impact.
  • November’s meeting remains uncertain and data-dependent.
  • Sterling and gilts remain highly sensitive to QT details.

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