US Federal Reserve leaves rates on hold, although three Committee members dissented in favour of an increase. Oil prices rebounded sharply amid further tensions in the Middle East

Risk-sensitive assets came under pressure ahead of this morning’s US Federal Reserve rate decision. Renewed Middle East tensions lifted oil prices and bond yields across Europe and the US, with 10-year Treasuries moving back towards 4.65%. The geopolitical developments weighed on investor sentiment, with the S&P down more than 0.5% before the Fed announcement amid further weakness in chipmakers. Recent anxiety around the AI trade will face another test today, with Meta and Microsoft due to report earnings. Currency markets were broadly stable.

After falling sharply at the start of the week, front-month Brent futures rose back above US$90 per barrel, from below US$83 early yesterday morning, as renewed skirmishes across the Middle East raised concerns about disruption to energy flows and the outlook for ongoing talks. The Islamic Revolutionary Guard Corps targeted a US airbase and command centre in Jordan and claimed to have hit three tankers prompting President Trump to vow forceful response, while the US military, alongside Saudi Arabia, struck targets in Iraq.

The FOMC left rates on hold at 3.75%, as expected by economists. However, the decision was not unanimous, with three regional Fed presidents on the 12-person Committee dissenting in favour of a rate increase. The market had priced around 8bp of tightening ahead of the meeting, equivalent to roughly a 30% chance of a hike - a rare degree of uncertainty heading into a rates decision. Policymakers did not update their economic forecasts or rate projections, with the next update due in September.

The vote marked the fifth consecutive meeting at which officials left rates unchanged. However, the dissents – albeit from known hawks - suggest it could become more challenging for the Fed to continue holding rates steady if inflation concerns intensify. Aside from the vote split, the short accompanying statement was otherwise unchanged from June, with officials repeating their pledge to “deliver price stability.” The hawkish hold suggests there is a risk of a move in September though will depend on the incoming data.

US Treasury yields dipped immediately after the decision, led by the front end, which had priced a reasonable chance of a hike ahead of the meeting. The US dollar followed front-end yields lower, although the moves were modest. Outside of the Norwegian krone, which strengthened on the rise in oil prices, G10 currency moves have been limited since the NZ close. NZD/USD traded back towards 0.5800 after the Fed decision, recovering from an earlier dip, while US equities trimmed earlier losses.

Australian core inflation was softer than expected, prompting markets to pare expectations for further RBA tightening. The trimmed mean measure rose at a 3.6% annual rate, below economists’ 3.7% forecast. The probability of another 25bp hike this year fell towards 50%, from more than 90% before the report, contributing to lower front-end yields and a steeper curve. The AUD also dipped after the release.

NZ fixed income rallied in the local session yesterday, taking its cue from the strong post-CPI rally in Australian rates markets and looking through the rebound in crude prices. NZ 2-year swap rates closed 5bp lower at 3.66%, while 10-year rates fell 7bp to 4.35%, flattening the curve. NZGBs largely matched the move in swaps, with 10-year bonds closing at 4.65%. Attention now turns to today’s weekly tender, with NZDM offering Apr-33 ($225m), May-35 ($175m), and May-41 ($50m).

ANZ business confidence is released today, with attention likely to centre on the inflation and real activity indicators. The Bank of England is expected to leave rates unchanged at 3.75% and publish updated forecasts, likely showing a slightly lower inflation profile. Market pricing is consistent with no change in policy. In the US, Q2 GDP and PCE data are both released. Consensus expects GDP to increase at a 2.1% annualised quarterly pace, while the monthly core PCE deflator is expected to rise 0.2%, with the annual rate dipping to 3.3% from 3.4% in May.

Stuart Ritson is a senior currency Strategist at BNZ Markets.