Credit Agricole expects the Federal Reserve to cut interest rates by 25 basis points this week, but with a cautious tone. The Fed will likely focus on ongoing concerns about inflation and a strong job market, which may limit future rate cuts in the near term. This approach could change the recent expectations about the Fed’s policies and might keep it from aligning closely with other major central banks. As a result, the US dollar could receive temporary support.

Dollar Stability Forecast

The US dollar has weakened lately due to worries about its status as the reserve currency, but Credit Agricole sees these concerns easing. The firm predicts the dollar will stabilize soon and expects a broad recovery by 2026 as interest rate differences and economic fundamentals improve. The Federal Reserve is likely to cut its key interest rate this week, but it will stress the importance of persistent inflation and a strong job market. The August 2025 inflation report showed core CPI is steady at 3.4%, and the latest jobs report added a solid 210,000 payrolls, giving the Fed reason to consider a pause on further cuts. This view challenges market expectations for more aggressive cuts, suggesting traders might use options to bet that interest rates won’t drop as quickly as now anticipated. This stance should provide immediate support for the US dollar, which has been struggling for months. The Dollar Index (DXY) has fallen from 105 to nearly 102 in the last quarter, but it may be set for a rebound as the Fed takes a different path compared to other more dovish central banks. In the upcoming weeks, traders might think about buying short-term call options on the dollar or puts on the Euro to take advantage of this potential change.

Market Implications

For equity markets, the combination of a rate cut and hawkish commentary could bring significant uncertainty and volatility. With the VIX volatility index currently low at around 14, the market appears complacent and may not be ready for a less dovish Fed. As a result, buying volatility through VIX futures or using index option strategies like straddles may be a smart way to prepare for a potential market shift. This situation is reminiscent of events in 2019, when the Fed cut rates but indicated it wasn’t the start of a long easing cycle, leading to temporary market turbulence. As these factors unfold, the dollar should stabilize before gaining strength into 2026. Ultimately, we expect interest rate differences and economic fundamentals to align in favor of the dollar. Create your live VT Markets account and start trading now.

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