FOMC Preview - Summary

Date: 29 July 2026

Author: Kathleen Brooks, Research Director UK

Overview

The Federal Reserve is anticipated to maintain its current interest rate range of 3.5% to 3.75% during its upcoming announcement. However, rising oil prices have led to a 30% probability of a rate hike being priced into the futures markets, as indicated by the CME’s FedWatch tool.

Potential Rate Hike Considerations

New Fed Chair Kevin Warsh may surprise the markets with a rate hike, but such a decision would likely be more about risk management rather than current economic indicators. Recent labor market data shows a significant slowdown, with June's Non-Farm Payrolls (NFP) at just 57,000 and a steady unemployment rate of 4.2%. Additionally, the labor force participation rate has dropped to 61.5%.

Inflation Trends

Inflation has shown signs of moderation, with a 0.4% month-on-month decrease in June and an annual rate of 3.5%. Core CPI remained flat monthly, with an annual rate dropping to 2.6%. Factors contributing to this moderation include:

• Lower-than-expected tariff pass-through effects.
• Significant moderation in shelter inflation.
• Decreasing energy prices, which may enhance disinflationary pressures.

Despite these positive signs, concerns remain regarding price pressures from rising AI costs and geopolitical tensions affecting oil prices.

Forward Guidance Challenges

Governor Warsh has expressed skepticism towards forward guidance, which may lead to confusion among investors regarding the Fed's future policy direction. If the Fed opts to hold rates steady, the lack of a clear timeline for future policy changes could create uncertainty in the markets.

Market Impact

The absence of forward guidance means that the market's reaction to the Fed's decision could be binary. The prevailing sentiment suggests that the market may be overestimating the likelihood of an immediate rate hike. If the Fed decides to remain on hold, it could be interpreted as a dovish stance, potentially leading to a decline in Treasury yields and the dollar's value.

Currently, the USD index has risen by 3% this year, reaching its highest level in over a year. The GBP/USD pair has faced downward pressure due to haven demand for the dollar and differing expectations for central bank policies. However, if the Fed holds rates, the GBP could rebound, with key resistance levels identified at $1.3428 and $1.3475.

Conclusion

The upcoming FOMC meeting is a critical event for financial markets. With Governor Warsh's departure from forward guidance, the primary focus will be on the rate decision itself, with limited impact expected from the subsequent press conference.

About the Author

Kathleen Brooks is the UK research director at XTB, boasting over 20 years of experience in financial markets. She is recognized for her expertise in foreign exchange and has been featured in various media outlets, including BBC and Sky News.