On Wednesday, the US dollar strengthened significantly against major non-US currencies such as the euro, pound sterling, and yen, achieving a remarkable increase for the period. However, as the new trading day began, the bullish momentum of the US dollar weakened, and the market experienced a slight pullback and adjustment.

Yesterday's core focus in the financial markets was the first Federal Open Market Committee (FOMC) policy meeting since Kevin Warsh took over as Chairman of the Federal Reserve. This interest rate decision was widely interpreted as a hawkish move to maintain stability. Although the new chairman significantly streamlined the official statement following the meeting, essentially eliminating the forward guidance on future interest rate movements that the market was familiar with, and also refrained from submitting his personal interest rate expectations in the latest dot plot, the overall inclination of the committee members towards rate hikes was very clear. Data shows that nine Fed policymakers expect at least one rate hike this year, with one member being even more aggressive, predicting three rate hikes of 25 basis points each this year. Five other members anticipate two rate hikes of the same magnitude this year.



This hawkish dot plot result completely reversed the market's previous expectations of easing, with investors significantly increasing their bets on interest rate hikes. The financial market has now fully priced in a 25 basis point rate hike by the Federal Reserve in October, and data shows an 80% probability of a September rate hike, making it extremely certain. Furthermore, the market has largely digested the expectation of another 25 basis point rate hike in March next year, and the Fed's phased tightening monetary policy path has been fully priced in.

Even though the current situation in the Middle East shows signs of easing and the deadlock in the Strait of Hormuz is expected to be resolved, bringing benefits to global inflation due to the cooling of geopolitical risks, the results of this interest rate meeting clearly show that high inflation remains the Federal Reserve's core policy concern, and it is unlikely to be completely alleviated in the short term. The Federal Reserve members significantly raised their full-year inflation forecasts, with a particularly significant upward revision to core inflation indicators: the year-end overall personal consumption expenditures (PCE) inflation rate forecast was revised sharply upward from 2.7% in June to 3.6%, and the core PCE inflation rate forecast was also revised upward from 2.8% to 3.3%, highlighting that US inflation is sticky much more than the market had previously expected.

The global monetary policy stage is shifting, with markets focusing on the Bank of England's decision.

With the Federal Reserve's interest rate decision now finalized, global markets' focus has officially shifted to the Bank of England. The market consensus is that the Bank of England will maintain its current stable stance and keep the benchmark interest rate unchanged. Looking back at the Bank of England's last policy meeting, Governor Bailey clearly signaled a dovish policy stance, emphasizing that the central bank has no immediate urgency to raise interest rates. Given the significant uncertainty surrounding the impact of the current geopolitical conflict with Iran on the UK economy, tolerating inflation above the official target in the short term is a reasonable choice in line with the current economic situation.

The latest UK inflation data also supports the Bank of England's decision to postpone interest rate hikes. Data shows that the UK's Consumer Price Index (CPI) rose steadily at 2.8% year-on-year in May, the lowest level in 13 months, clearly indicating a cooling trend in domestic inflation. Coupled with the US-Iran memorandum of understanding, rising expectations of a ceasefire in the Middle East, and the potential reopening of the Strait of Hormuz, external inflationary pressures have further eased. Therefore, the Bank of England's policymakers have virtually no incentive to shift towards a more hawkish interest rate hike stance.

According to real-time pricing data from the UK overnight index swap (OIS) market, investors are currently betting slightly that the UK may implement a 25 basis point interest rate hike this year. However, if the Bank of England's meeting continues its dovish stance of "not in a hurry to raise interest rates," the market will further postpone its rate hike expectations, and the pound will face significant downward pressure.

Besides the monetary policy decision, pound traders are also closely watching the upcoming by-election in Manchester, England. Triggered by the resignation of Labour MP Simms, this by-election has garnered significant attention from both the British political and financial markets. The frontrunner, Andy Burnham, is highly likely to win, and his core objective is interpreted by the market as challenging Labour leader Keir Starmer's leadership, with a potential run for Prime Minister. Subsequent political developments will indirectly influence the pound's exchange rate.

The yen continues to face downward pressure, with the risk of intervention in the foreign exchange market looming; US stocks have stopped falling and are showing signs of a rebound.

Against the backdrop of a generally strong US dollar, the yen has continued to weaken, with the USD/JPY exchange rate firmly holding above the 160 mark. Despite repeated public statements from Japanese monetary authorities reiterating their close monitoring of exchange rate fluctuations and readiness to take appropriate measures to address the yen's depreciation, they have failed to effectively curb the dollar's upward momentum. The uncertainty surrounding foreign exchange market intervention keeps all yen traders on high alert. However, it is worth noting that the Bank of Japan raised interest rates this week, yet this failed to boost the weak yen, leading to widespread market skepticism that even if Japanese authorities intervene in the foreign exchange market in the short term, it will be difficult to initiate a sustained appreciation and recovery for the yen.

U.S. stock markets were under pressure yesterday, with all three major indices closing lower. The Nasdaq, which comprises a large number of technology growth stocks, saw the most significant decline, primarily due to rising expectations of a Federal Reserve interest rate hike. A high-interest-rate environment significantly discounts future cash flows, directly depressing the valuations and current prices of high-growth technology stocks, thus dragging down the Nasdaq.

However, market sentiment did not remain pessimistic. US stock index futures rebounded slightly overnight and opened strongly bullish today. Even though US President Trump released a hawkish statement, saying that if he was not satisfied with the outcome of the US-Iran negotiations, conflict between the two countries could break out again, and geopolitical risks remain, investors remained optimistic and chose to take advantage of the stock market correction triggered by the Fed's decision to buy on dips, driving the stock index futures to rebound first.