The U.S. dollar moved higher Thursday following volatile trading in the aftermath of the Federal Reserve’s interest rate reduction, while the British pound slipped as investors awaited the Bank of England’s policy announcement.
By 04:05 ET (08:05 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, had gained 0.1% to 96.605, bouncing back after Wednesday’s drop to its lowest since February 2022.
Dollar rebounds after early losses
The dollar initially fell to a three-and-a-half-year low after the Fed lowered rates by 25 basis points on Wednesday, in line with expectations, signaling a gradual approach to further cuts this year.
The currency recovered sharply after Fed Chair Jerome Powell described the reduction as a “risk-management cut” in response to a cooling labor market and emphasized that there is no need to rush additional easing.
The Fed’s dot plot forecasted a median of 50 more basis points in rate reductions over the remaining two meetings of 2025, with only one cut projected in 2026.
Analysts at ING commented: “Regardless of the market’s hectic reaction, we read this as a negative event for the dollar. Despite Powell’s cautionary tone, the FOMC has clearly shifted to a dovish stance where it sees multiple cuts, and the focus is now firmly on the employment side of the mandate.”
With employment a central focus for the Fed, attention will turn Thursday to the weekly initial jobless claims report, particularly after last week’s spike.
Sterling drifts lower ahead of BoE decision
GBP/USD traded 0.1% lower at 1.3610, following a brief rise to its highest since July 2 during the prior session.
The Bank of England is expected to maintain rates at 4% later Thursday, with inflation at 3.8% in August — the highest in 19 months and nearly double its 2% target.
The BoE’s prior reduction last month marked its fifth cut since August 2024, and analysts expect one more cut before year-end.
EUR/USD rose 0.2% to 1.1837 after reaching 1.1918 on Wednesday, the highest since June 2021, reacting to the Fed’s policy move. The ECB left rates unchanged last week but highlighted uncertainty in trade, energy prices, and FX markets, signaling a flexible approach to potential future cuts.
ING said: “We expect a return to 1.185 in EUR/USD over the coming days, and continue to target 1.20 in the fourth quarter.”
Other currencies under pressure
USD/JPY rose 0.1% to 147.07 after falling as much as 0.7% on Wednesday to its lowest since July 7. The Bank of Japan is widely anticipated to hold rates steady at the end of its two-day meeting on Friday, amid heightened political uncertainty following Prime Minister Shigeru Ishiba’s unexpected resignation.
Japanese CPI data for August, expected before the BoJ meeting, is likely to show persistent price pressures, with core inflation remaining well above the 2% annual target.
USD/CNY traded 0.1% higher at 7.1073, easing slightly after hitting near 10-month highs, supported by ongoing policy measures from Beijing. China also pledged further stimulus this week to boost private spending after weak economic data.
AUD/USD dropped 0.1% to 0.6642, while NZD/USD fell 0.9% to 0.5910 after Q2 GDP data revealed a contraction in New Zealand, prompting speculation of more aggressive rate cuts later in the year.
This content is for informational purposes only and does not constitute financial, investment, or other professional advice. It should not be considered a recommendation to buy or sell any securities or financial instruments. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.