Foreign Exchange Commentary

Summary

• FOMC cuts rates 25 bp to 4.25% with only one dissent coming from Stephen Miran for a 50 bp cut
• The DXY is trading at 97.53 after post Fed cut after an early week sell-off
• Lisa Cook participated in the Fed meeting amidst her governorship dispute with the Trump administration
• The U.S. and U.K. created a $318 Billion bi-lateral tech partnership during Trump’s State visit
• The Bank of Canada cut rates to 2.5% and noted the Canadian economy is slowing
• The Bank of Japan held rates steady at 0.25% as inflation continues to hamper the Japanese economy
• President Trump and Xi Jinping held a call Friday morning to discuss the sale of the U.S. arm of TikTok

FOMC cuts rates 25bp     
The Federal Open Markets Committee had their September rates meeting resulting in the first interest rate cut since December 2024. The expected 25bp cut brought the overnight rate to target to 4.25% in a nearly unanimous decision save one dissent, in favor of a 50 bp cut from Stephen Miran – the FOMC’s controversial new committee member.

On Monday, the Dollar Index (DXY) opened at 97.64 and sold off immediately dropping to 96.60 by mid-day Wednesday. While most G10 currencies gained against the dollar, Tuesday saw the Euro in particular hit a 4-year high against the dollar, trading as high as 1.1911. Upon news of the FOMC rate decision and release of the dot plot, the DXY sank as low as 96.20 after one committee member projected 200 bp of rate cuts by year-end 2027 (currently 1-2 more 25 bp rate cuts are projected for the rest of 2025.) However, after Powell’s remarks, the DXY shed its losses and is now trading at 97.63.

Powell’s tone appeared hawkish in his speech; while he conceded that the fight with inflation wasn’t going to end anytime soon, he mentioned that the upside risks have diminished and that this cut was “a risk-management cut” aimed at tackling a weakening labor market. He remarked: “nominal wage-growth has eased and as the jobs-to-workers gap has narrowed.” With the current unemployment rate is 4.2%, it appears that the rate of job creation is running below the break-even rate needed to keep unemployment constant.

One a more positive note, backed by the 3^rd straight broad gain on retail sales (0.6% vs 0.2%), the summary of economic projections improved their 2025 GDP outlook to 1.6% up from 1.4% last month. The next few months will be challenging as the Fed pursues its dual mandate- with inflation warming, unemployment rising, and Fed Independence remaining in question, the dollar will likely remain volatile with worsening expectations we enter a rate cutting cycle.

U.S. – U.K. State Dinner
King Charles III and the Royal Family hosted President Trump for a state dinner at Windsor Castle on Wednesday in what became the first time in history the U.K. hosted two states visits for the same leader. U.K. Prime Minister Kier Starmer and President Trump also got together for a private meeting before hosting a joint press conference on the second day of the trip.

While the U.K. has been largely successful at navigating the Trump administration and its tariffs (The U.K. is currently dealing with 10% tariffs on imports) they recently gave up their goal to remove the 50% steel tariffs. Though the two countries are at odds over the best way to address various geopolitical conflicts the leaders lauded their work towards a $338 Billion package of bilateral commercial investments primarily in technology. After the conference, the two leaders hosted a reception of various tech leaders and businessmen including Nvidia’s Jensen Huang who has been lobbying the Trump Administration for support with its Chinese disputes.

The Bank of England left their interest rate steady at 4% in a 7-2 vote as inflation concerns continue to hamper the U.K. With a 0.3% MoM increase and an annual rate of 3.8%, CPI was in line with expectations but doesn’t appearing to be improving. As a result, the BoE appears unlikely to cut rates in the short run though unemployment remaining at its highest rate since August 2021 may create a similar “risk management rate cut” like the U.S. just did in the coming months.

After the Federal Reserve dot plot release Tuesday, the Pound-Sterling was trading as high as 1.3725, up from the week’s start though it has since paired back some of these gains currently trading at 1.3644. As the BoE continues to work through its GILT restructuring, the Pound may exhibit continued strength as investment flows return. Since January, the pound has gained 11% against the greenback.

Bank of Canada cuts Rates
The Canadian Dollar has been trading between 1.36-1.39 since April and is currently trading at 1.3796 after the Bank of Canada cut rates for the first time since March. The 25 bp cut went as expected with the current BoC interest rate set at 2.5% by Governor Tiff Macklem and company. The bank had a notable tone shift downgrading its economy to slowing due to a 7.1% unemployment rate, muted GDP growth, and a struggling housing market.

The removal of retaliatory tariffs by Canadian Prime Minister Mark Carney’s Administration has reduced tariff inflation risks and there is currently a 50% chance of a 2^nd consecutive cut in October for the BoC – though forward guidance remains limited. The Canadian economy remains behind, shrinking 1.6% in GDP during the second quarter but is expected to hold at its current levels against the U.S. dollar.

BOJ Remains Neutral
Japan’s government is undergoing political shifts after Shiguru Ishibia announced his resignation as Prime Minister, leaving the Liberal Democratic party scrambling to regain momentum. The Yen, which was trading as high as 151 in March has remained in a 146-148 range as Japan continues to content with elevated inflation and stagnant GDP growth (0.1% growth in 2024.)

While Thursday evening’s headline inflation read beat expectations coming in at 2.7% vs 2.8% expected, the BoJ’s “core-core-inflation” which strips out food and energy costs has remained above 3%. While a rate cut this go-around is not expected, there is growing expectation of an October rate hike to taper inflation which could cause further Yen gains against the U.S. Dollar as the Fed intends to cut rates.

U.S. China Trade talks resume
Treasury secretary Scott Bessent and U.S. Trade Representative Jamison Greer met with their Chinese counterparts Vice Premier He Lifeng and top trade negotiator Li Chenggang on Monday in Madrid for the 4^th straight month of negotiations. Among the main topics of discussion this go-around was the divestiture of the U.S. arm of TikTok to U.S. companies and the sale of Russian oil to China.

For now, the 50% imports on Chinese firms remain in place though they are currently on pause until November 10^th. Friday’s phone call between Chinese Premier Xi Jinping and President Trump appeared productive with the two expected to meet again in South Korea for the APEC summit. The President on a truth social post mentioned the two discussed trade, Russia-Ukraine, illegal fentanyl shipments, and the approval of the TikTok deal. He also stated that he would be visiting China early next year and that Xi Jinping would be doing the same.

The Chinese economy has been tepid over the last few months with diminished industrial output and continued deflation concerns. The onshore renminbi is currently trading at 7.10, steadily gaining over the year against the U.S. dollar as China continues to set higher midpoint exchange rates while simultaneously injecting liquidity into the markets to stabilize the yuan.