On Friday (October 23) during the Asian session, the US dollar index fluctuated slightly higher, currently trading around 101.65, still within its low range since early October. Market focus is shifting to next week's Federal Reserve interest rate meeting. Danske Bank expects the Fed to keep policy rates unchanged at the October meeting, consistent with market consensus. The market is currently pricing in a 15%-25% probability of a rate hike. The bank noted that most core FOMC members have signaled that they believe action can wait until December, but a few members advocate for greater urgency. Danske Bank expects 2-3 votes in favor of a rate hike. In the baseline scenario, the bank judges the Fed to raise rates gradually, with 25 basis points each in December 2026 and March 2027, with the risk skewed towards more rate hikes.

The logic behind remaining inactive: Most officials prefer to wait for more data.

Danske Bank notes that while the Federal Reserve initiated its rate hike cycle with a 25-basis-point increase at its September meeting, the bank expects rates to remain unchanged next week, with a resumption of rate hikes in December. The September dot plot shows that most participants favor only one more rate hike in 2026. The bank's analysis states that although Chairman Warsh provided limited guidance, Vice Chairs Williams, Jefferson, and Bowman all indicated a desire to see more data before raising rates. Danske Bank believes their core argument is that financial conditions have tightened significantly since September. If Warsh agrees with this assessment, only a few additional voting members need to support holding rates steady to maintain the current level. The bank also mentions that Waller believes there is still room for further rate hikes but is flexible on the timing; Kashkari stated that only one more rate hike is needed in 2026—however, this statement was released before the latest CPI data.

Further tightening measures are needed: one more in December and one more in March next year.

Danske Bank believes further tightening is still necessary, therefore maintaining its forecast of two more rate hikes in December and March of next year. The bank points out that recent higher-than-expected inflation mainly reflects rising energy prices, which the Fed should "see through," but core inflation has already shown a slight upward trend. Downside risks to the labor market are limited, and the growth outlook is strong. The Atlanta Fed's GDPNow model points to a 3.5% annualized quarter-on-quarter GDP growth in the third quarter, supported by strong growth in consumption and investment. Danske Bank believes the Fed considers these components as indicators of underlying growth momentum more relevant than actual GDP. The bank also notes that a few voting members—especially Hammack and Logan—have called for a more urgent tightening of monetary policy. Danske Bank believes they may vote against rate hikes, as they did in July. Among the remaining voting members, Barr, Cook, and Paulson are neutral and did not discuss the timing of rate hikes. Powell has not spoken publicly since stepping down as chairman.

Market Impact: The US dollar is under pressure in the short term, but remains bullish in the medium term.

Danske Bank believes that if the Federal Reserve keeps interest rates unchanged and Warsh continues his limited guidance approach, US Treasury yields may decline slightly, and the yield curve may steepen again. The bank argues that the current inaction reinforces the logic of "following rate hikes only on a quarterly basis." This is largely priced in, but it will reduce the market's perception of a rate hike in January next year. (US Dollar Index Daily Chart, Source: FX678) At 13:42 Beijing time, the US Dollar Index was at 101.67.