Fed Split Sparks Softer Dollar Tone, Supports Euro

The Federal Reserve's decision to leave interest rates unchanged has sparked a significant internal split among its officials, leading to a softer US Dollar tone and supporting the Euro. The Dollar Index fell by 0.5% to 100.89, while EUR/USD gained 80 pips to 1.1470.

The Fed's decision was seen as less hawkish than expected, with three officials dissenting in favor of a 25bp hike. This led to a reduction in the total hike for this year, from 42bp on Tuesday to 33bp currently priced by markets.

Markets are now pricing in a 63% probability of a 25bp hike in September, with investors judging the Fed's response insufficient to contain persistent inflation. The US 2Y Treasury yield rose sharply as a result, while longer-dated yields also increased.