Global FX Markets React to Fed’s Hawkish Cut
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A Report by CYS Global Remit Counterparty Sales & Alliance Unit
USD/SGD | 1.2875 – 1.2975 |
Federal Reserve’s Policy Shift: A Hawkish Cut with Divergent Market Interpretations
Global currency markets traded cautiously following the Federal Reserve’s widely anticipated 25-basis-point rate cut, the third adjustment in its current easing cycle. While the mechanical reduction in the federal funds target range to 3.50–3.75 percent aligned with consensus expectations, the underlying tone of the Federal Open Market Committee (FOMC) and Chair Jerome Powell proved materially more hawkish than markets had priced in.
The internal dynamics of the FOMC highlighted a divided committee, with two policymakers preferring no change and one calling for a larger cut. This split reflects a central bank attempting to calibrate policy amid a cooling labour market but persistent inflation uncertainties. Powell emphasized that the decision function remains data-dependent and explicitly stated that further easing is not on a preset path, reinforcing the risk that the Fed may not deliver the pace of cuts markets had hoped for. The updated dot plot reinforced this caution: policymakers’ median projection still shows only one additional cut in 2026, unchanged from September's forecasts. Analysts at ING interpreted this configuration as evidence of a “hawkish tilt,” a view validated by the moderation in risk appetite across Asia.
The initial market reaction saw the U.S. Dollar Index (DXY) fall 0.4 percent immediately after the decision before stabilizing to a mild 0.1 percent decline. Futures reflected similar softness. However, the lack of deeper selling pressure demonstrated that FX markets were already pricing in a dovish scenario, and Powell’s tone contained enough caution to prevent a more pronounced dollar downtrend. Beyond monetary policy, attention is now turning to the political dimension of U.S. monetary leadership. President Donald Trump’s upcoming appointment to replace Powell once his term ends in May introduces a significant layer of uncertainty. The frontrunner, economic adviser Kevin Hassett, is expected to advocate a materially faster pace of rate cutting—potentially reshaping forward guidance and creating a more dovish Fed in 2025–2026. Markets will remain sensitive to confirmation developments, particularly if perceived shifts in leadership increase volatility in the Treasury curve.
Against this backdrop, G10 currencies reacted in line with their respective macro drivers. The Japanese yen (USD/JPY) slipped 0.1 percent, benefiting modestly from dollar softness but remaining structurally weak amid Japan’s slow normalization trajectory. The Singapore dollar (USD/SGD) gained 0.1 percent, reflecting MAS’s stable policy setting and Singapore’s relative macro resilience. Similarly, the South Korean won (USD/KRW) strengthened 0.3 percent, continuing its sensitivity to global sentiment and trade flows.
In contrast, the euro remains on track for both weekly and monthly gains. While EUR/USD slipped 0.1 percent to 1.1689, the medium-term narrative is increasingly constructive, supported by more encouraging Eurozone data and stabilizing expectations around the ECB. ING highlighted that the market has already priced out additional ECB cuts, although they caution that it remains too early to price in 2026 hikes. The forecast for EUR/USD to consolidate in the high-1.16 range, with potential to reach 1.18 by year-end, hinges on softer U.S. labour data and constructive revisions to Eurozone growth forecasts.
Asia-Pacific FX: Domestic Data Diverges from Global Macro Forces
While the Fed set the top-down tone for FX markets, Asia-Pacific currencies moved according to a mix of global influences and region-specific catalysts.
The Australian dollar was the notable underperformer, falling 0.6 percent in one report and 0.4 percent in another (reflecting different timestamps). The trigger was the surprise release of weak labour market data: total employment fell by 21,000, driven by a sharp decline in full-time positions. The unemployment rate held steady at 4.3 percent, but the composition of the labour data raised meaningful concerns. This unexpected softness complicates the Reserve Bank of Australia’s policy calculus. The RBA has been signalling vigilance on inflation, but the latest employment figures reduce the feasibility of near-term rate hikes. Markets interpreted the data as meaningfully dovish for the RBA path, leading to AUD selling amid a risk-off undertone.
In China, both the onshore yuan (USD/CNY) and offshore yuan (USD/CNH) traded largely flat, reflecting a PBOC-guided stabilization strategy. The muted price action indicates that—at least for now—the Fed’s cut did not significantly alter the policy divergence narrative between the U.S. and China, especially given China’s ongoing growth-management posture.
Meanwhile, the Indian rupee returned to the spotlight as USD/INR climbed 0.6 percent to 90.3, approaching its record high of 90.5. The rupee’s vulnerability stemmed from renewed capital outflows, driven by foreign investor selling, as well as stronger domestic demand for dollars. The pair’s movement reaffirms India’s structural position: strong growth fundamentals but persistent sensitivity to USD liquidity conditions and portfolio flow dynamics. Approaching record lows will likely raise pressure on the RBI to step in—either through direct intervention or liquidity management—to maintain orderliness in the currency market.
Regional currency reactions were broadly consistent with global sentiment but differentiated by local catalysts:
• KRW and SGD benefitted from modest USD weakness.
• JPY remained capped, consistent with Japan’s slow-moving monetary stance.
• CNY/CNH were suppressed by policy-driven stability.
• AUD and INR underperformed sharply due to domestic weaknesses.
Outlook and Strategic Implications
The immediate post-Fed environment has reinforced a more nuanced phase for global FX markets, where U.S. policy direction continues to anchor broad sentiment but no longer singularly dictates regional outcomes. The Fed’s hawkish-leaning cut has tempered expectations of an aggressive easing cycle, introducing a more balanced narrative in which economic data, labour-market trajectory, and potential leadership changes at the central bank will shape the 2025 policy path. This recalibration keeps the dollar from entering a sustained downtrend while still allowing for episodic softness driven by data volatility.
Across the G10 complex, currencies will increasingly trade on differentiated fundamentals. The euro’s improving macro backdrop offers constructive medium-term support, while the yen and Swiss franc remain constrained by their respective central banks’ deliberate policy approaches. These divergences will matter more as the global easing cycle becomes staggered rather than synchronized.
Within Asia-Pacific, the divergence is even more pronounced. Australia’s labour-market weakness poses clear downside risk to the AUD, while renewed INR depreciation underscores India’s sensitivity to capital-flow dynamics. Meanwhile, SGD, KRW, and CNY are likely to remain relatively anchored, supported by credible policy frameworks or managed stability mechanisms. As these regional dynamics evolve, FX markets are set to become more idiosyncratic, with greater emphasis placed on domestic economic performance, central bank signalling, and cross-border flows.
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