Fed Holds Rates at 3.75-4% as Bank of Canada Hikes for First Time in Three Years and UK Budget Raises Borrowing by £65 Billion

Markets on Wednesday were focused on a trio of major central bank and fiscal events, with the Federal Reserve widely expected to hold its benchmark rate unchanged at 3.75% to 4.00% following a quarter-point hike in September. CME FedWatch data put the probability of another increase at below 10%, leaving all attention on Fed Chair Kevin Warsh's 2:30 PM ET press conference for signals on a potential December move. Treasury yields held near 5% on the 10-year, the US dollar sat at a two-week high around 102.50 on the DXY index, and the S&P 500 had dropped on each of the six most recent FOMC decision days, keeping equity futures cautious heading into the afternoon. UBS separately said it expects two additional Fed hikes by mid-2027.

The Bank of Canada delivered its first rate increase in roughly three years, raising its overnight target by 25 basis points to 2.50%, in line with expectations, and warned that further hikes may be needed. Governor Macklem said the governing council debated two options and reached strong consensus that the balance of inflation risks had shifted, citing energy prices that are expected to stay higher and cost pressures building in the business sector. The BoC lifted its 2026 growth forecast to 1.0% from 0.7% and sharply raised its inflation projections, now seeing CPI averaging 2.9% in 2026 versus 2.5% in July and 3.1% in 2027 versus its prior 2.0% estimate. Macklem noted that even with Wednesday's hike the policy rate remains low enough that it is not restraining growth, and said future decisions would be taken one meeting at a time.

In London, Chancellor John Healey presented a budget that the Office for Budget Responsibility said would add £65 billion to net borrowing over the 2026 to 2031 period compared to March plans. Borrowing for 2026 to 2027 was revised up to £133.2 billion, or 4.2% of GDP, from the prior forecast of 3.6%. Fiscal headroom against the spending rule came in at £15 billion, just below the £15.2 billion the market had expected and well below the £23.6 billion available at the previous budget. The OBR cut its 2027 GDP growth forecast sharply to 1.0% from 1.6% while raising the 2026 figure marginally to 1.2% from 1.1%, and projected inflation peaking at a quarterly rate of 3.75% in early 2027. The OBR put the probability of meeting the fiscal mandate at 56%, down from 59% at the 2025 budget, and warned that margins against the targets are very small. Healey pledged to raise defense spending to 3% of GDP by 2030, announced £10 billion in additional support for Ukraine, and said a planned bank tax surcharge would be temporary and below 8%, less severe than the City had feared. Sterling was little changed after the address.

US goods trade data added to the day's macro picture, with the September advance goods trade deficit widening to $134.9 billion, the largest since March 2025 and well above the $130.2 billion consensus estimate. Capital goods imports surged 7.5%, driven by computers, semiconductors and telecommunications equipment linked to AI data center expansion, while exports rose 2.6%, beating the 1.3% forecast but failing to offset the import surge. The Reserve Bank of New Zealand also surprised markets by holding its policy rate at 2.75% against expectations for a 3.00% level, sending the New Zealand dollar down roughly 1% against the US dollar and nearly 2% against the Australian dollar, the steepest one-day drop against the Aussie since 2017.

Gold traded around $4,040 to $4,070, pulling back from a weekly high amid a firmer dollar and oil prices near four-year highs following Houthi attacks on a Saudi oil refinery. Bitcoin held above $81,000, buoyed by $286 million in spot ETF inflows over the prior two days after roughly $774 million in withdrawals the previous week, with traders watching the Fed decision for direction toward either $88,000 or a pullback to $76,000 support.