Dollar pauses rally ahead of Fed, BoE meets as well

Will the US election outcome impact Fed policy?

After hitting a four-month high on the heels of Donald Trump’s return to the White House, the dollar is pulling back today, as traders may have decided to lock some profits after the sharp rally and ahead of the Fed decision later today.

With Trump’s tax cut and tariff policies seen as refueling inflation, market participants believe that the Fed may need to proceed with slower rate cuts from here onwards. Although they are nearly certain that the Committee will slash rates by 25bps today, the probability of Fed officials stepping to the sidelines before Christmas is now resting at around 32%, while the likelihood for a January pause stands at around 53%.

So, a rate cut on its own today is unlikely to shake the markets much and traders may turn their attention to the statement and Powell’s press conference for clues on whether officials are indeed considering slowing the pace of future reductions. That said, Powell may prefer to keep his cards close to his chest for now and wait for clearer signals on what a Trump presidency could mean for the economy and inflation.

Thus, if Powell and his colleagues disappoint those expecting a pause around the turn of the year, the dollar may extend its current retreat as Treasury yields pull back. The opposite may be true if the Fed hints at a potential rate cut break.

BoE decision in the limelight as well

The Fed is not the only central bank on today’s agenda. Ahead of the Fed, the BoE will announce its own decision.

A few weeks after the September decision, BoE Governor Bailey said that they may need to be more active with rate cuts if the data continued to suggest progress in inflation, and indeed, the September numbers revealed that the headline CPI slipped to 1.7% y/y from 2.2%, while the core rate dropped to 3.2% y/y from 3.6%. This prompted market participants to nearly fully price in a quarter-point reduction at today’s meeting.

However, with the Office for Budget Responsibility forecasting that the measures announced in the Autumn Budget could push inflation higher, the BoE may be prompted to keep interest rates higher for longer. This added to speculation that the Bank may refrain from pushing the rate cut button in December, with the pause probability resting at nearly 70%.

Thus, like with the Fed, the spotlight is likely to fall on hints and signals regarding the BoE’s future course of action. Should policymakers revise up their inflation projections and/or signal that they would proceed more carefully, the pound may recover some more ground.

Wall Street marches to record highs on Trump victory

On Wall Street, all indices skyrocketed to fresh record highs, with the small-cap Russell 2000 gaining almost 6% and the Dow Jones up by more than 3.5% as investors kept cheering Donald Trump’s victory.

Lower tax cuts and deregulation in the Trump 2.0 era may be a positive development for Wall Street, but tariffs and slower Fed rate cuts are not. With that in mind, it seems that investors are currently focusing on the positive measure, but it may not take long before they start paying attention to tariffs and Fed policy.

Should the Fed appear a bit cautious on future rate cuts as soon as today, equity investors may decide to lock in some profits, thereby allowing a small pullback.