The Federal Reserve has kept interest rates the same, staying in the 4.25% to 4.50% range. This time, two Fed officials disagreed with the decision, marking the first disagreement since 1993. Looking at the economy, things are stable, with low unemployment and inflation slightly higher than the target.

Currency Movements

The economy’s growth is slowing, with a drop in consumer spending and a weaker housing market. Predictions show that the Personal Consumption Expenditures (PCE) price index will rise by 2.5% and core inflation by 2.7% in the coming year. The Fed will watch new data closely but has not hinted at possible rate cuts soon. Following the announcement, US stocks fell, with the S&P down by 0.38% and the NASDAQ down by 0.21%. The US dollar showed strength, while both the EUR/USD and GBP/USD fell. The EUR/USD dropped below its 50% midpoint since May, trading at 1.1431, while the GBP/USD tested its midpoint from April at 1.3248. The USD/JPY climbed above its midpoint, aiming for higher values. Powell stressed the need for careful review of inflation and job data before making any decisions in September. This cautious approach led to declines in the markets, with the Dow falling by 250 points and the S&P dropping by 15 points. Yields on two-year and ten-year bonds went up slightly after the rates announcement. While the Fed is keeping rates steady, the dissenting opinions highlight disagreements within the committee. This division creates uncertainty for the upcoming weeks, making markets likely to respond quickly to new economic data.

Short Term Yield and Job Creation

Holding rates steady led to an increase in short-term yields, but now the spotlight is on the potential for a rate cut in September. The Fed will closely monitor the next two employment and inflation reports before deciding. Traders might want to consider strategies that benefit from increased volatility around these announcements. Powell also mentioned a slowdown in job creation in the private sector. The June 2025 report showed only 150,000 new private jobs were added, making the upcoming jobs report this Friday crucial. If it shows another weak performance or an uptick in the unemployment rate from 3.9%, the chance of a rate cut in September would rise and could weaken the dollar. The Fed’s caution is reasonable since inflation is still above target levels. The latest core PCE reading for June 2025 was 2.7%, reminding us of the inflation challenges faced in 2024. Until we see this number drop towards 2%, the Fed’s hawkish position is likely to limit significant stock market gains. As Powell spoke, the stock market turned downhill, indicating that investors were hoping for a more aggressive approach from the Fed. The CBOE Volatility Index (VIX) rose to 17, signaling that traders are preparing for more market instability. In this environment, buying protective puts on indexes like the S&P 500 or selling call spreads could be smart ways to manage risk. The US dollar gained strength as the Fed appears more set on keeping rates steady compared to other central banks. After the press conference, the EUR/USD fell below an important technical support level. This dollar strength might continue, suggesting that betting on a stronger dollar against other major currencies could be a solid short-term strategy. Create your live VT Markets account and start trading now.

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