USD: Bumpy ride on the Fed roller coaster – ING

It's FOMC day, and the Fed is widely expected to cut rates by 25bp. There are many moving parts to today's meeting, but let's go through a few of them. First at 20CET, we'll get the FOMC statement and an update of the Summary of Economic Projections (SEP), which includes the Dot Plots on median expectations for the Fed Funds rate over 2025, 2026, 2027 and the longer term.

DXY sellers could re-emerge in the 97.50/98.00 area

"In the statement, beyond the 25bp cut, we'll be looking for a phrase like 'In considering additional adjustments to the target range' which the Fed used last year to signal a succession of cuts. The alternative: 'In considering the extent and timing of additional adjustments', would reflect hesitancy and lift short-dated rates and the dollar. The statement will also show the voting pattern, which could be something like eight for a 25bp cut, three for 50bp (Waller, Bowman, Miran) and perhaps one for unchanged rates (Schmid)."

"On the Dot Plots, the majority of economists think the median 2025 Dot Plot will continue to see just two cuts – i.e. policy ending the year in the 3.75-4.00% target range from 4.25-4.50% now. This could be a problem for the short end of the US curve, which prices 70bp of rate cuts. Expectations are that the 2026 Dot will add one extra cut to the June projection, so it would shift to 3.25-3.50%, while the 2027 Dot would also shift by one cut to 3.00-3.25%. In short, the Dot Plot could show a slower trajectory of getting to 3.00-3.25% compared to current pricing of that zone being hit late next summer."

"The dollar is going into this meeting on the soft side as the Fed prepares to restart its easing cycle. There are some upside event risks to the dollar from the Dot Plot – and perhaps from Powell's press conference too. Nonetheless, today should confirm that the Fed is embarking on a 125bp easing cycle. We would see any upside spike in the dollar as temporary and corrective – eg, DXY sellers could re-emerge in the 97.50/98.00 area. And we doubt a slightly more gradual easing cycle than the market expects needs to trigger a sharp re-pricing of risk assets."