Fed decision in focus – Language and tone likely to determine sentiment

Updates from the Fed and BoC are top of mind for traders today, with the former garnering the majority of the attention at 6:00 pm GMT.

The Fed is all but certain to ease policy by 25 bps today, lowering the target rate to 4.00% - 4.25%, from 4.25% - 4.50%. The meeting kicked off yesterday with the new Governor Stephen Miran present – a Trump appointee – along with Governor Lisa Cook, whom Trump recently attempted to oust.

As you would expect, Miran is anticipated to vote in favour of a rate cut, potentially pushing for a bumper 50-bp reduction. This coincides with Trump urging Fed Chairman Powell and Co to, I quote, ‘CUT INTEREST RATES, NOW, AND BIGGER THAN HE [Powell] HAD IN MIND. HOUSING WILL SOAR!!!’

Focus on Fed language

Markets are fully pricing in a 25-bp Fed cut today, with another potential discount next month and another in December. Interestingly, by the end of 2026, 150 bps worth of cuts are implied. As I noted in previous posts, the cut is unlikely to jolt markets by much, with 25 bps being the base case. The focus is on the accompanying rate statement’s language, the tone from Powell’s post-meeting press conference, and the Fed's quarterly SEP, which will be crucial for understanding policymakers' expectations for the 2026 rate path. If the Fed pushes back against market expectations, yields and the USD should trade higher (Stocks and Gold lower).

Economic data remains a mixed bag. August US retail sales figures surprised to the upside, increasing by 0.6%, from 0.2% amid cooling job growth and persistent inflation.

BoC also set to cut rates

The BoC are also expected to reduce its overnight rate by 25 bps from 2.75% to 2.50%, with another cut on the table by the end of this year. Despite the BoC’s core inflation measures remaining elevated at 3.0%, the deterioration in the jobs market and economic activity contracting in Q2 25 has clearly reinforced market expectations.

Positioning ahead of the events

As shown below, the USD Index is testing monthly channel support (taken from the low of 72.70), which could help USD bids take hold should a hawkish Fed tone materialise. However, a dovish approach may prompt fresh YTD lows, potentially targeting daily support at 95.67.

For the CAD, the rate cut appears fully priced in, suggesting limited downside from a standard 25-bp cut. However, should the central bank choose to hold steady, this could provide a sizeable CAD bid, and – as shown in the chart below – send the USD/CAD beneath the neckline of a head and shoulders top pattern, taken from the low of CAD1.3721.

Equity markets face a more nuanced picture. Trading around all-time highs, Stocks may need substantial dovishness from the Fed today to extend gains. Conversely, any hawkish surprise could prompt short-term profit-taking; however, the confirmation of a cutting cycle should ultimately support risk assets.

Until the Fed decision, that’s it from me this morning; happy trading!