To The Moon

On Wednesday, the Fed's latest meeting minutes showed that all 19 officials supported the September rate hike, with most participants believing that further increases in interest rates may still be necessary before the end of the year. Although market bets on an immediate October hike have cooled noticeably, the Fed's hawkish stance continues to provide support for the dollar.

At the same time, concerns over France's fiscal situation pushed European bond markets under renewed pressure, and the euro fell sharply on Wednesday, gradually approaching the 17-month low touched earlier this week.

At its meeting held on September 15-16, the Fed raised the target range for the federal funds rate by 25 basis points to 3.75%-4%, the first hike since July 2023. However, officials differed somewhat on the rationale for the increase. Some participants believed that higher rates would help prevent energy and other price shocks from further pushing up inflation; more hawkish officials argued that with U.S. economic demand remaining strong, higher rates had become a necessary measure to guard against demand-driven inflation pressures.

The minutes showed that most participants believed another increase in the target range for the federal funds rate before the end of this year could be appropriate. Several officials also said that the underlying growth momentum of the U.S. economy appeared to have strengthened.

Meanwhile, despite the notable recent rise in long-term U.S. Treasury yields, many officials believed that financial conditions overall were still supportive of economic growth, with U.S. stocks significantly higher this year and corporate bond credit spreads remaining at low levels.

Fed Chair Warsh said at a press conference after the September meeting that the rate hike was intended to withdraw some policy accommodation because inflation remained elevated. However, Fed Vice Chair Jefferson and New York Fed President Williams both signaled a more cautious stance last week, saying the Fed had time to further observe economic data before deciding whether to continue raising rates. This led the market to significantly reduce bets on a consecutive rate hike in October.

CME FedWatch data show that the market currently expects about a 19.4% probability that the Fed will raise rates by at least 25 basis points at this month's meeting, down from about 38% a week ago; however, the market still sees an 83% probability of a rate hike in December, indicating that investors still believe further monetary tightening this year is likely.

After the minutes were released, the dollar maintained its gains. The dollar index, which measures the greenback against a basket of major currencies, rose 0.32% to 102.24. Recent high energy prices have also provided some support for the dollar. Juan Perez, senior trading director at Monex USA, said that in an environment where access to energy resources is difficult, the dollar usually attracts capital flows.

At the same time, fiscal risk in Europe has become another main theme in the foreign exchange market. France's fiscal situation continues to trigger investor concerns, pushing up French and Italian government bond yields, with bonds from more heavily indebted countries facing more pronounced selling, while traditional safe-haven assets such as German bonds performed relatively steadily.

The yield on France's 10-year government bond surged 11.9 basis points on Wednesday to 4.8696%, on track for its largest one-day rise in two weeks; over the same period, the yield on Germany's 10-year government bond was basically flat at 3.4805%. This means the financing cost gap between France and Germany has widened further, reflecting investors' demand for higher risk compensation to hold French government bonds.

French bonds have recently come under sustained pressure. With the 2027 election approaching, French politicians are still struggling to form an effective consensus on reducing the budget deficit, while global central bank rate hike expectations and concerns about government fiscal positions have further pushed up bond yields. Spain's announcement of an early general election has also intensified market worries about European political uncertainty.

Bank of France Governor Emmanuel Moulin said that as financing costs rise, France's economic situation is indeed relatively severe, but it has not yet reached the point of needing assistance from the European Central Bank. French Finance Minister Roland Lescure said France will adopt a "strategic" approach when issuing new debt in the future.

Shriya Samarth, head of rates for Europe, the Middle East and Africa at StoneX, believes that French government bonds still have room to fall further, but that does not necessarily mean the market will descend into panic. She noted that France is not currently signaling an approach to debt default, so the situation has not reached the severity Greece faced during the European debt crisis.

Rising French fiscal risk, combined with a stronger dollar, has clearly weighed on the euro. The euro fell 0.53% against the dollar on Wednesday to $1.1198, gradually approaching the 17-month low set on Monday. The pound fell 0.42% against the dollar to $1.3216, although sterling at one point rose to its highest level against the euro since June 2025.

As for the yen, the dollar edged down 0.09% against the yen to 157.95. Bank of Japan new审议委员 Ayano Sato said she supports raising interest rates in stages, which provided some support for the yen.