17/09/2025 Market Watch
Fed Meeting & Policy Decisions Set to Drive Market Sentiment
Key Takeaways:
- Fed expected to cut rates by 25bp, focus on Dot Plots, vote split, and Powell’s tone.
- Equities and Gold at record highs, bond market watching 10-year yield below 4%.
- Dollar remains weakest currency, Swiss Franc strongest.
- BoC expected to cut 25bp to 2.50%, signals on future easing key.
- UK inflation in focus before BoE decision.
- U.S. retail sales surprised to the upside, raising the bar for a dovish Fed.
- Trade talks between U.S. and China showing rare optimism.
Financial markets are on edge ahead of tonight’s Federal Reserve decision, where a 25bp rate cut is fully expected. The real test will come from the details: the voting split, updated projections, and Powell’s press conference. With Fed funds futures pricing in around 70bp of easing this year, any confirmation of just 50bp could spark short-term volatility in U.S. rates and provide temporary support for the Dollar.
The stakes are elevated. Equities and Gold sit at record highs, and bond traders are watching the 10-year yield’s potential break below 4% as a trigger for broader repricing across global markets. The Dollar, currently the weakest currency this week, risks further downside if Powell signals a more aggressive easing path or hints at back-to-back cuts.
In Canada, the Bank of Canada is expected to lower rates by 25bp to 2.50%. The market will be watching whether Governor Macklem signals that more easing is possible given weaker growth and employment data. The Loonie’s performance may depend on how open the BoC remains to further accommodation.
The UK’s August inflation report will be crucial ahead of tomorrow’s BoE meeting. With policy expected to remain unchanged, the numbers could shape expectations for a possible November cut. A stronger inflation print would weaken the case for further easing.
Meanwhile, the Dollar stays pinned at the bottom of the performance table alongside Kiwi and Aussie, while the Swiss Franc, Euro, and Yen lead. Sterling and Loonie sit mid-pack. On the trade front, optimism emerged after Treasury Secretary Scott Bessent suggested a deal with China is “near,” with talks gaining momentum before reciprocal tariffs take effect in November.
Recent U.S. data adds complexity. Retail sales rose 0.6% in August, tripling expectations and pointing to resilient consumer demand despite weakening payrolls and tariff-related pressures. This resilience makes the bar for a dovish Fed shift higher, forcing Powell to balance optimism on consumption with rising employment risks.
United States of America
Overview
The Federal Reserve is expected to deliver a 25bp rate cut today, marking the start of a new easing cycle. Attention will be on the FOMC statement and the updated Summary of Economic Projections (SEP), particularly the Dot Plots which will map policymakers’ expectations for the Fed Funds rate through 2025, 2026, 2027, and the longer term. The choice of language in the statement will be critical. A phrase suggesting readiness for “additional adjustments to the target range” would imply a series of cuts, while more cautious wording around “extent and timing” would point to hesitation, likely lifting short-dated rates and supporting the Dollar.
The Dot Plots are expected to signal a slower trajectory of easing than what markets are currently pricing. Economists broadly see two cuts in 2025, leaving policy at 3.75-4.00% by year-end compared to 4.25-4.50% now. For 2026, an additional cut may appear, bringing the range to 3.25-3.50%, with 2027 projected at 3.00-3.25%. This path would imply that the Fed reaches the 3.00-3.25% zone later than markets anticipate.
Following the release of the statement and SEP, Chair Jerome Powell’s press conference will provide further guidance. Markets will be looking for his balance between highlighting risks to employment and addressing tariff-related inflation. Powell is likely to acknowledge that policy can become less restrictive, but without committing to a more aggressive pace of cuts.
The Dollar enters the meeting on the weak side, with traders broadly positioned for bearish outcomes. While the Dot Plots or Powell’s comments could deliver temporary support, today is set to confirm the Fed’s move into a 125bp easing cycle. Any short-term strength in the Dollar is likely to be corrective, with sellers expected to reappear on rallies.
Economic Drivers
- FOMC expected to deliver a 25bp rate cut, starting a new easing cycle.
- Language in the statement will indicate whether the Fed is signaling a sequence of cuts or a cautious stance.
- Dot Plots likely to show a slower path of rate reductions than markets currently expect.
- Powell expected to focus on employment risks while downplaying inflation concerns from tariffs.
- Markets positioned bearishly on the Dollar, limiting the scope for a lasting rebound.
Data and Events
- 17 September 2025: Building Permits
- 17 September 2025: Housing Starts
Price Action
- Dollar trading on the soft side ahead of the meeting.
- Upside event risks to the Dollar from Dot Plots and Powell’s tone, but any gains seen as temporary.
- Sellers expected to return on DXY rallies toward the 97.50–98.00 range.
- Risk of a breakdown toward 95 if Powell signals stronger emphasis on employment over inflation.
Key Points:
- Fed set to cut rates by 25bp, beginning a 125bp easing cycle.
- Statement language and Dot Plots will define market reaction.
- Projections suggest slower easing path than markets expect.
- Powell likely to balance jobs risk against inflation concerns.
- Dollar weakness likely to persist despite possible corrective spikes.
Australia & New Zealand
Overview
Australia’s Westpac Leading Index slipped into negative territory in August, falling to -0.16% from 0.11% in July. This marks the first below-trend reading since September 2024 and highlights a noticeable moderation compared to the February peak of 0.86%. The result reflects a softening economy after a stronger June quarter, signaling that momentum is easing as the year progresses.
Westpac described the weakness as not overly concerning, but it does point to slower activity. Growth is projected at 1.9% for 2025, which is an improvement from 1.3% in 2024 but still below the long-term trend. A full return to trend is expected only in 2026.
The Reserve Bank of Australia will meet on 29–30 September and is widely expected to keep the cash rate steady at 3.6%. While policymakers remain cautious, Westpac sees scope for a 25bp cut in November should inflation ease further and demand remain subdued. Two additional cuts are anticipated in 2026, but the RBA will wait for confirmation of underlying trends before committing to renewed easing.
Economic Drivers
Data and Events
- 17 September 2025: Westpac Consumer Sentiment (NZD)
- 17 September 2025: Current Account (NZD)
- 17 September 2025: MI Leading Index
Price Action
No immediate technical developments highlighted.
Key Points:
- Westpac Leading Index turned negative in August, signaling slowing momentum.
- Growth outlook: 1.9% in 2025, 1.3% in 2024, return to trend expected in 2026.
- RBA to hold cash rate at 3.6% in September.
- Potential 25bp cut in November if data confirms soft demand and easing inflation.
- Further easing likely in 2026, but contingent on incoming data.
Canada
Overview
The Bank of Canada is expected to cut its policy rate by 25bp today, lowering it to 2.50%. This follows a weaker-than-expected inflation report, with headline CPI rising 1.9% year-on-year compared to the 2.0% forecast, while core inflation held steady at 3.0–3.1%. The inflation profile is not strong enough to prevent easing, particularly given growing signs of slack in the economy.
The labour market has softened significantly, with unemployment climbing to 7.1%, the highest since 2021, and employment data showing consecutive monthly losses. Growth contracted by -0.4% quarter-on-quarter in Q2, or -1.6% annualised, undershooting the central bank’s own projections. Activity surveys suggest further weakness ahead, reinforcing the case for pre-emptive easing.
Markets are also pricing in another rate cut by December, a scenario that seems increasingly plausible. Governor Tiff Macklem is unlikely to push back against expectations for more easing, instead maintaining a data-dependent stance. With the U.S. Federal Reserve also set to cut rates, today’s outcome will be pivotal in shaping USD/CAD dynamics.
Economic Drivers
- Headline CPI rose 1.9% in August, below the 2.0% forecast.
- Core inflation stable at 3.0–3.1% for three months, easing concerns about persistent pressures.
- Unemployment rate at 7.1%, highest since 2021, with continued job losses.
- Canadian economy contracted -0.4% in Q2 (-1.6% annualised), weaker than BoC projections.
- Activity surveys indicate rising downside risks to growth.
- Markets expect another 25bp cut in December, with some forecasts for two further cuts in 2025.
Data and Events
- 17 September 2025: BOC Rate Statement
- 17 September 2025: Overnight Rate
- 17 September 2025: BOC Press Conference
Price Action
- USD/CAD trading near 1.37 with limited reaction expected from today’s decision.
- Decisive break below 1.3725 would confirm, opening the way to 1.3538.
- Sustained move under 1.3538 would expose 1.3149 based on longer-term projections.
- CAD bias remains bearish against most G10, though USD weakness could limit near-term downside.
Key Points:
- BoC expected to cut policy rate 25bp to 2.50%.
- Weak inflation and deteriorating labour market reinforce case for easing.
- Canadian economy contracted in Q2, adding pressure for further accommodation.
- Market pricing signals another cut by December.
- USD/CAD risks tilted lower if technical support breaks.
Europe
Overview
The euro has strengthened notably, with EUR/USD breaking above a 10-week trading range. This move has been supported by narrowing two-year EUR:USD swap rate differentials, which have shifted around 50bp in favour of the euro over the same period. Market appetite for the pair remains strong, with dips likely to attract buyers, particularly during the Federal Reserve’s policy announcement and Powell’s press conference.
Beyond the U.S. influence, euro seasonality is also turning supportive. November and December have historically favoured the euro against the dollar, with 1.1910 seen as the last key resistance level before 1.20 is tested. This combination of rate dynamics, seasonality, and technical momentum continues to favour the single currency.
Attention in Europe today turns to the ECB’s wage tracker index. The previous reading showed negotiated wage growth slowing sharply to 1.7% in the first quarter of 2026 from 4.6% in the same quarter of 2025. Markets will watch to see if it has recovered closer to 2.0%, especially as business optimism improved over the summer. Investors currently price only 11bp of ECB easing by next summer, reinforcing the perception that the easing cycle is complete.
Economic Drivers
- EUR/USD supported by narrowing two-year EUR:USD swap rate differentials, shifting 50bp in favour of the euro.
- Seasonality supports the euro into November and December, historically strong months for the currency.
- ECB wage tracker in focus, with prior reading showing wage growth slowed to 1.7% from 4.6%.
- Improving business optimism raises questions about wage dynamics heading into year-end.
- Markets currently price just 11bp of ECB easing by next summer, suggesting the cycle is over.
Data and Events
- 17 September 2025: ECB President Lagarde Speaks
- 17 September 2025: Final CPI
Price Action
- EUR/USD broke above 10-week range, reinforcing bullish momentum.
- Demand expected on dips toward 1.1750–1.1780 during Powell’s press conference.
- Resistance at 1.1910 remains the last barrier before 1.20 is tested.
Key Points:
- EUR/USD breakout reflects narrowing rate differentials in favour of euro.
- Seasonality adds further support into November and December.
- ECB wage tracker release will gauge wage recovery amid improved sentiment.
- Markets see just 11bp of ECB easing by next summer, suggesting no further cuts.
- 1.1910 key resistance before potential move to 1.20.
United Kingdom
Overview
Sterling’s recent rally lost momentum after reports confirmed that the Office for Budget Responsibility had downgraded UK productivity forecasts. This revision is expected to deprive Chancellor Rachel Reeves of anticipated revenues and could add £9bn to the fiscal gap ahead of November’s budget. The prospect of a more difficult fiscal position raises downside risks for the currency heading into the final quarter of the year.
Despite this, monetary policy dynamics provide some offset. The Bank of England has recently turned more hawkish, maintaining pressure on inflation expectations. However, the latest August CPI data showed services inflation at 4.7%, slightly below consensus, even as the BoE’s preferred services measure held steady at 4.2% year-on-year. This mix of weaker productivity, fiscal challenges, and stubborn inflation continues to weigh on sentiment toward the pound.
Sterling’s outlook remains tied not only to domestic conditions but also to broader dollar dynamics. GBP/USD is expected to find support around 1.3600 before rebounding toward 1.37, while fiscal concerns may be more relevant for EUR/GBP, which is likely to remain rangebound given the BoE’s hawkish stance.
Economic Drivers
- Office for Budget Responsibility downgraded UK productivity forecasts, widening fiscal gap by £9bn.
- November’s budget now carries negative event risk due to weaker fiscal outlook.
- August CPI services inflation printed at 4.7%, slightly below expectations.
- BoE’s preferred services inflation measure steady at 4.2% YoY, highlighting persistent pressures.
- Bank of England maintaining a hawkish stance, balancing against fiscal vulnerabilities.
Data and Events
- 17 September 2025: CPI
Price Action
- GBP/USD expected to find support near 1.3600, with potential recovery above 1.37.
- EUR/GBP likely to remain rangebound between 0.8650 and 0.8715.
- Fiscal concerns weigh more heavily on EUR/GBP than GBP/USD.
Key Points:
- UK productivity forecasts downgraded, widening fiscal gap by £9bn.
- November budget presents downside risk for sterling.
- August services inflation at 4.7%, BoE measure steady at 4.2%.
- BoE’s hawkish stance offsets fiscal concerns in near term.
- GBP/USD supported by dollar dynamics, EUR/GBP contained in range.
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