Why Tonight’s Fed Decision Could Reset FX Markets

Tonight the Federal Reserve delivers one of its most closely watched decisions of the year. Markets expect another 25bp rate cut, bringing the target range down toward 3.50%–3.75%. But as ever, the cut itself is not the story.

What matters is the signal:

• How confident is the Fed that inflation is moving sustainably lower?

• How concerned is it about slowing growth and labour-market softness?

• And crucially, how quickly - if at all - does it intend to ease from here?

With the US dollar having weakened over the past two weeks and uncertainty around the global outlook rising, tonight’s Fed communication will be decisive for FX markets heading into December.

What the Market Expects, and What’s at Stake

A 25bp cut is fully priced in. That means the risk for markets is not the Fed’s action, but how the Committee frames the path ahead.

Three scenarios are in focus:

1. A cautious, data-dependent tone

This is the base case. The Fed acknowledges progress on inflation but avoids committing to further cuts without clearer confirmation from incoming data.

Market reaction: USD stabilises or strengthens modestly; GBP/USD and EUR/USD soften.

2. A more dovish tilt

If Powell suggests the Fed is leaning toward additional cuts early in 2026, markets could accelerate the recent dollar decline.

Market reaction: USD extends weakness; risk assets rally; EM FX gains.

3. A hawkish warning

If the Fed emphasises lingering inflation risks or expresses discomfort with market expectations, it could push yields higher and send the dollar higher again.

Market reaction: USD rebounds sharply; risk sentiment weakens.

The challenge for the Fed is that the economic picture is mixed: hiring is slowing, retail spending is softer, and inflation expectations have eased. Yet core services inflation and wage data remain sticky enough to prevent an overly dovish message.

Tonight’s press conference may therefore be more important than the rate move itself.

How FX Markets Are Positioned Going In

FX markets are in a state of anticipation rather than conviction.

The Dollar

The USD has drifted lower recently as markets priced in more aggressive easing for 2026. But positioning is now cleaner, meaning any surprise could trigger outsized moves.

Sterling

GBP has struggled since the UK Budget, and although the dollar’s pullback helped steady GBP/USD, sterling remains fundamentally fragile. A hawkish Fed could easily push GBP/USD back down after its recent recovery.

The Euro

EUR remains capped by weak regional data and lacklustre demand. If the Fed stays cautious, EUR/USD could lose momentum again.

In short, the FX market is poised (but not committed) ahead of the Fed.

What It Means for Clients, Corporates & Advisers

For high-net-worth clients - planning cross-border transfers, overseas purchases or diversifying internationally - the combination of a wobbly sterling and a potentially volatile dollar makes timing exceptionally important.

For importers and global businesses, the implications are practical and immediate. A stronger dollar raises costs, whilst a weaker dollar boosts margins - but these can reverse quickly. Tonight’s event should be built into near-term hedging strategies and financial planning. Waiting for clarity may mean absorbing unnecessary volatility.

For referral partners (accountants, lawyers, real-estate advisers) your clients are already making significant decisions influenced by fiscal changes, Budget announcements and investment flows. Adding FX risk to the conversation, especially before a major event like tonight, helps clients prepare and not react. This is precisely where advisers add value: by connecting macro events to real-world financial outcomes.

Strategic Steps to Consider

• Lock in rates using forward contracts for known FX needs over the next 1–6 months.

• Split large FX transactions into tranches to reduce the impact of timing risk.

• Run Fed-scenario analyses for clients with multi-million exposure.

• Watch Powell’s press conference, not just the statement. Subtle changes in tone often move markets more than the decision itself.

  
  

Tonight’s Fed announcement will set the tone for the remainder of the year. With sterling still vulnerable after the UK Budget and the dollar poised for either a rebound or a renewed slide, this is a pivotal moment for anyone with FX exposure.

Disclaimer: The information in this publication is provided for general information purposes only. It does not constitute financial or investment advice, nor should it be relied upon as such. Readers should consider their own circumstances and seek independent advice where appropriate.