The DXY Index held below 98 throughout last week ahead of this week’s FOMC meeting. Apart from markets fully pricing in a 25-bps rate cut to 4.00-4.25% on September 17, the expectation for further rate cuts is also weighing down on the USD. Even if Fed Chair Jerome Powell keeps his cautious stance on tariff-led inflation, the greenback could depreciate. The extremely low US nonfarm payrolls on September 5 have not only undermined the US exceptionalism narrative, but also increased recession worries. US equities have held up largely because markets expect deeper rate cuts to cushion growth risks. Hence, we won’t be too hasty in betting on the USD’s haven status.  

The Fed’s independence will be a significant factor in this FOMC meeting that could hurt the USD. US President Donald Trump is seeking greater influence over the seven-member Fed Board of Governors. Lisa Cook’s voting rights remain suspended under a federal appeals court ruling in favour of her reinstatement. At the same time, Stephen Miran would gain a vote if the Senate confirms his nomination to the Board. Fed Governor Michelle Bowen and Christopher Waller, who dissented at the last meeting’s hold decision in favour of a 25-bps cut, could push for a larger 50-bps cut.

USD/CAD could retreat from the ceiling of its month-long range of 1.3720-1.3930. On September 17, we expect the Bank of Canada to lower its target for the overnight rate by 25 bps to 2.50% after keeping it unchanged for three meetings. Real GDP contracted by 1.6% QoQ sa in 2Q25 while 1Q25 growth was revised down to 2% from 2.2%. CPI inflation declined to 1.7% YoY in September from 1.9% in August, in the lower half of the official 1-3% target. The labour market shed 65.5k jobs in August, worse than the 40.8k loss in July, while unemployment rose to a four-year high of 7.1% in August. Hence, the BOC keeps the door open for another easing. However, it may not hurt the CAD if the BOC stresses that its easing cycle would halt at the floor of its nominal neutral rate range of 2.25-3.25%.

Keep a close eye on GBP/USD, which may break above its month-long range, mostly between 1.36 and 1.38. On September 18, the market widely expects the Bank of England to keep the bank rate unchanged at 4% and affirm the market’s expectations to delay cuts to next year. At the August 25 meeting, the decision to lower rates to address growth concerns was highly divisive – four voted for a 25-bps cut, one for a larger 50-bps reduction, while four opposed, favouring a 25-bps hike due to sticky inflation. Specifically, the BOE explicitly noted that “the restrictiveness of monetary policy has fallen as the bank rate has been reduced,” stressing that the timing and pace of further reductions will depend heavily on how underlying inflation and disinflation pressures evolve.

GBP’s downside pressures from UK budget concerns have eased. Fed cut expectations helped pull down long-term bond yields, including the 30-year Gilt yield. The delay of the Autumn Budget to November 26 and Prime Minister Keir Starmer’s cabinet reshuffle reflected the government’s intention to retake control of the narrative, with a focus on delivering long-term economic stability through tough budget decisions. Chancellor Rachel Reeve’s fiscal challenges should not be confused with Liz Truss’s mini-budget crisis in 2022- the debate today is about navigating fiscal credibility and growth priorities, while Truss lost credibility by announcing unfunded tax cuts without oversight by the Office for Budget Responsibility amid a global inflation problem.

USD/JPY has been consolidating in a 146-149 range since early August, driven by a weak US jobs market weighing on the greenback. The Bank of Japan is widely expected to keep its target rate unchanged at 0.50% on September 19. On the same day, consensus expects National CPI inflation to decline to 2.8% YoY in August, below 3% for the first time since November. However, the BOJ will likely keep the door open for more hikes; high nominal wage growth remains weak in real terms.

USD/JPY will also pay more attention to the Liberal Democratic Party (LDP) leadership election on October 4. Leading candidate Sanae Takaichi is considered harmful for the JPY because she supports increased fiscal spending and opposes further BOJ rate hikes to stimulate economic growth. While Takaichi is more popular with the public, Shinjiro Koizumi has significant backing from LDP supporters. Koizumi is more aligned with targeted fiscal measures rather than broad fiscal stimulus and is respectful of the BOJ’s independence, suggesting a potentially more stable-to-positive outlook for the JPY.

In summary, the USD’s relative appeal is at risk if the Fed affirms further rate cuts, while the BOC signals its easing cycle is nearly over, the BOE pushes rate cuts into 2026, and the BOJ keeps its hiking bias intact.

Quote of the Day
“It is easy to sit up and take notice. What is difficult is getting up and taking action.”
     Honore de Balzac

September 15 in history
In 2008, Lehman Brothers filed for Chapter 11 bankruptcy, the largest bankruptcy filing in US history.

 

Philip Wee

Senior FX Strategist - G3 & Asia

[email protected]