Above: Chair Powell answers reporters' questions at the FOMC press conference on July 26, 2023. Image: Federal Reserve.

The Dollar was broadly weaker in the wake of the Federal Reserve's July decision to raise interest rates by 25 basis points and signal that any further rate hikes would be entirely dependent on the nature of incoming data.

The decision and tone struck by the Fed and its Chair Jerome Powell were therefore largely in line with market expectations, allowing financial markets to revert back to the trends of recent months.

Such trends include rising stocks, falling U.S. bond yields and a falling Dollar.

"USD was lower against all the major economies that we track during Asian trading, building on yesterday’s post‑FOMC drop. U.S. Treasury yields fell a little more," says Kristina Clifton, an analyst at CBA.

In sympathy, the Pound to Dollar exchange rate extended its recovery from a Monday low at 1.2797 to 1.2953 and in the process kept alive its broader multi-month rally.

The highs near 1.31 can therefore come into play again owing to the intact GBPUSD uptrend and it would take a significant undershoot in UK inflation data next month, or a stronger than expected U.S. labour market and inflation report, to disrupt the setup.

"It's fair to say that this was always going to be a holding hike for the Fed, and for markets, with limited new information likely to have been forthcoming or available. It's hard to review the meeting and stray from that view. We have two payrolls and two CPI prints before the next FOMC and they, amongst other things, will determine whether there's another hike in September and/or beyond," says analyst Jim Reid at Deutsche Bank.

The Federal Reserve issued a statement that was almost unchanged from that issued in June, suggesting the Fed was in no mood to let the market assume the hiking cycle was now done.

Importantly, this helps it to rein in market expectations for early 2024 rate cuts, which would effectively ease financial conditions in the U.S. and risk stimulating inflation.

Powell said in the press conference that, "looking ahead, we will continue to take a data-dependent approach in determining the extent of additional policy firming that may be appropriate."

The Fed meanwhile believes the threat of an imminent recession is greatly reduced, and while they "welcome" the softer June CPI inflation data, it wants to see more such readings as evidence inflation is definitely cooling.

"On the topic of pausing hikes in September, Powell was noncommittal and noted the data could change substantially by then," says Reid.

Above: Bigger picture, the GBPUSD uptrend is intact.

"Chair Powell's press conference was as close to straight down the middle as one could expect. He declared an equal likelihood of a hike or a pause in September, reminding the audience that there are a lot of data to be digested between now and then, and that the Fed would take a 'data dependent' approach," says John Velis, FX and Macro Strategist for the Americas at BNY Mellon.

Analysts at Barclays are however confident the Fed will raise interest rates on one more occasion before the year is out, a view which could mean some repricing in favour of the Dollar at some point.

"We expect the FOMC to hike another 25bp in November, hold through June, then make four incremental cuts to the funds rate from July-December 2024," says Marc Giannoni, an economist at Barclays.

Markets currently see the Fed cutting rates from early in 2024, but Powell said the Fed will make a judgment about whether to cut rates "a full year from now".

The Fed and the market are therefore not aligned in their expectations on the increasingly important question of U.S. interest rate cuts. Should the data validate the Fed's guidance then the Dollar can, at some point, firm.

But for now, the Fed has not done enough to stand in the way of the Dollar's trend of weakness.