Test 2 - 4bps Of Fed Hikes: Why October Odds Are Capping US Dollar Strength

Institutional banks broadly expect the Federal Reserve to deliver at least one more rate hike in December, with limited odds of an additional move in October. This shift in near-term rate expectations has softened the US dollar’s momentum, but most banks still see the policy backdrop as broadly supportive of the currency, pointing to a gradual, rather than abrupt, adjustment lower and the potential for short‑term gains if the Fed maintains a restrictive stance.

MUFG/BTMU: Diminished October hike odds temper near-term dollar strength

MUFG/BTMU highlights that stronger September US inflation data means they “still expect the Fed to hike rates one more time this year in December and can’t completely rule out the probability of another back-to-back hike this month.” However, they note that the US rates market has recently reduced the likelihood of an October move, with “only around 4bps of hikes priced in” after Fed officials, including Chair Kevin Warsh, avoided signalling urgency for further tightening. MUFG/BTMU concludes that this scaling back of October expectations “has helped to dampen the US dollar’s upward momentum in the near-term,” even though further hikes remain likely, implying a softer but still fundamentally supported dollar profile.

"MUFG/BTMU: We still expect the Fed to hike rates one more time this year in December and can’t completely rule out the probability of another back-to-back hike this month after the stronger US inflation data for September."

ING: Softer dollar driven by position adjustment, but decline seen as orderly

ING observes that “the dollar continues to trade with a soft undertone,” which they link to lingering effects of AI-related concerns and the unwinding of stretched long positions and short-term overvaluation. While acknowledging that this softer backdrop has shifted risks “somewhat further in a USD-bearish direction,” ING still anticipates a “gradual and orderly dollar decline rather than a sharper depreciation.” They stress that the broader narrative around the Fed, oil and rates “remains supportive,” suggesting that any dollar weakness is likely to be controlled rather than disorderly.

"MUFG/BTMU: Recently the US rate market has been scaling back Fed rate hike expectations for this month and there is currently only around 4bps of hikes priced in after Fed officials including Chair Kevin Warsh refrained from signalling that they are in a rush to raise rates further after tightening policy for the first time last month."

Commerzbank: December hike priced, hawkish pause could offer temporary dollar support

Commerzbank reports that “for October…a rate hike by the Fed is generally no longer expected,” with a December increase already reflected in market pricing and an additional hike still seen as possible by mid‑next year. Their experts, however, “do not foresee any further hikes after December.” Commerzbank argues that if the Fed delivers a “hawkish pause” next week, the dollar could gain ground in the short term, whereas “any deviation from a restrictive stance” that forces markets to lower their expectations, particularly for next year, would likely put the dollar under pressure. This view underscores that near-term dollar performance is closely tied to how firmly the Fed signals ongoing policy restrictiveness.

"MUFG/BTMU: The scaling back of October Fed rate hike expectations has helped to dampen the US dollar’s upward momentum in the near-term although further hikes remain likely."

The takeaway

Across the institutional commentary, the US dollar is seen as losing some immediate upward momentum as markets scale back expectations for an October Fed hike, even though a December move is widely anticipated and further tightening remains possible. MUFG/BTMU and Commerzbank both emphasize the importance of upcoming Fed communications for short-term dollar direction, while ING frames current softness as largely position-driven and expects any downside to be gradual. Overall, the policy and rates backdrop is still regarded as broadly supportive, suggesting a controlled, rather than abrupt, adjustment in the dollar’s trajectory.