Dollar gains as 'AI sentiment improves' ahead of Fed decision

The Dollar has gained so far this week as AI sentiment improves and investors brace for hawkish undertones from tonight’s FOMC decision. We see no chance of any change in rates: since the hot September CPI data, a number of Fed officials have all played down the need to tighten just yet and futures now see less than a one-in-ten chance of a hike.

Data since the last meeting has also been mixed. Core PCE came in softer than expected, growth in payrolls has slowed, wage pressures have eased and higher Treasury yields have continued to do some of the Fed’s work for it.

We are not, however, necessarily expecting a unanimous vote. One or all of Hammack, Kashkari or Logan - the three arch hawks on the committee - could favour a hike, despite recent cautious voiced by the latter two.

There is no dot plot this month, so the focus will be on the tone of Chair Warsh’s presser. We expect him to say the economy is solid and inflation is too high, without giving explicit guidance.

Any hint at a December hike, which remains our call, is likely to be couched in data dependence. With a December move mostly priced in, we see limited room for near-term upside.