The Federal Reserve is expected to hold rates today despite stronger-than-expected September inflation. Markets price the odds of a hike at this meeting below 10%, while a December increase is already priced in. The 10-year Treasury yield remains above 5%, and the dollar index is rising for a fourth straight day, suggesting traders are braced for a hawkish Fed.

The pause is logical but not easy to justify. Last month the committee unanimously voted to raise rates to curb price growth, and its projections then assumed another step this year. Subsequent data only reinforced those concerns: September CPI accelerated to 3.7% y/y, with core inflation beating expectations; producer prices jumped 1.3% m/m and 6.3% y/y versus 5.6% in August—the fastest rise in over four years, with a large share due to energy. Expensive energy is keeping inflation from easing.

Still, some officials signaled caution. Vice Chair Philip Jefferson and New York Fed president John Williams said about a month ago the Fed has time to assess the economy before another hike. Governor Christopher Waller later added that timing remains flexible and hiking at every meeting is unnecessary. That group shaped market expectations for a pause, so today's decision should not surprise markets.

The intrigue is in voting. In July three regional presidents dissented and wanted a 25-bp hike when the Fed paused. They could repeat that today. Cleveland's Beth Hammack warns that repeated supply shocks may embed inflationary expectations in firms and households, making disinflation harder. Neel Kashkari says the Fed's job is to tame inflation after five years of supply shocks. Dallas's Lorie Logan has argued this month for further hikes, noting yields could slow the economy.

The press conference will be decisive. Kevin Warsh consistently refuses to give explicit guidance, saying at the IMF meetings in Bangkok that he does not pre-determine meeting outcomes: "This is a new chapter at the Fed, and we don't do that anymore." September's press conference was notably shorter, and Warsh has formed a working group to review conference formats and communications.

For markets this implies several takeaways. A pause without hawkish language would weaken the dollar, lift gold, and give AI stocks a breather—which is what happened in Asia today. Hawkish language would strengthen the dollar, press gold and euro area currencies, and add pressure to bonds. Note that oil near $115/bbl and fears of post-midterm military action give the Fed reasons to be cautious.

I expect the Fed to hold rates but adopt a hawkish tone and possibly face several dissenting votes. Warsh is unlikely to promise December explicitly but will confirm readiness to act if inflation does not cool. In that case the dollar will retain its edge and yields will remain high. If the tone is softer than expected, a dollar pullback and gold rally are possible, though I would not count on a prolonged move.

Technical picture for EUR/USD

Buyers need to reclaim 1.1140. Only that would allow a test of 1.1155, then 1.1180, but doing so without major player support will be difficult. On the downside, expect serious buying only near 1.1115; if that level fails, wait for a new low near 1.1090 or consider longs from 1.1050.

Technical picture for GBP/USD

Pound buyers need to take resistance at 1.3300 to target 1.3330, above which further upside would be difficult. The far target is 1.3360. On the downside, bears will try to seize 1.3265; a break would hit bulls and send GBP/USD toward 1.3230 with scope to 1.3200.