
EUR/USD approached 1.1392 after the Fed's hawkish dot plot and stripped guidance repriced rate expectations. Yields surged, risk assets fell. BCB cut rates.
The Fed left rates unchanged at 3.50%-3.75% at Chair Warsh's first meeting, stripping the forward guidance and the easing bias from the statement. The unanimous decision, the first since July last year, was paired with a dot plot that shifted higher: nine of 18 policymakers now favor at least one rate hike before year-end, while only one still projects a cut.
The brief statement concluded with a clear priority: "The Committee will deliver price stability." The updated Summary of Economic Projections reinforced the hawkish shift. Median PCE inflation for 2026 was revised to 3.6% from 2.7%; core PCE to 3.3% from 2.7%. All but one Fed official judged inflation risks as skewed to the upside.
Warsh declined to submit his own dot plot projections, reiterating his opposition to forward guidance. During the press conference, he said: "I think financial markets perform best when they react to incoming data." He announced a task force on Fed communications, among five established to review central bank practices. The task force will consider reducing public appearances and revising the SEP framework.
The yield curve bear steepened, with front-end yields rising as much as 13.2 basis points. The 2-year Treasury yield climbed to 4.20%, a level last seen in February 2025. Money markets now fully price a rate hike by October, based on fed funds futures pricing. The dollar rallied on the rate support. EUR/USD fell from above 1.1600 to briefly below 1.1500, approaching the August 2025 low at 1.1392.
Risk assets felt the squeeze. Major US equity indices fell 1.0% to 1.35% as investors adjusted to the prospect of tighter financial conditions. The combination of higher real yields and a more hawkish Fed poses a challenge for risk appetite.
Separately, the Brazilian central bank cut its policy rate by 25 basis points to 14.25% despite rising inflation expectations. Headline inflation for this year is now forecast at 5.2%, up from 4.6%, and 3.7% for end-2027. The BCB justified the cut by arguing that monetary policy must support economic stability and employment. "Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment," the bank said. The central bank indicated that projected inflation at the next relevant policy horizon is expected to fall below target, providing room for a gradual easing cycle.
The next market focus will be on inflation releases over coming months. With risks skewed to the upside, each print could shift rate expectations further. The Fed's data-dependent stance, as articulated by Warsh, means the data, not the central bank's reaction function, will drive the next move.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.