The U.S. Federal Reserve is expected to cut interest rates soon. However, HSBC predicts that the dollar might see a short-term boost right after the announcement. Traders have already factored in around 140 basis points of rate cuts through the end of 2026, leading to high expectations for the Fed’s actions. HSBC argues that if the Fed does not hint at faster rate cuts, the dollar could rise briefly after the decision is made. Despite this potential increase, it is likely to be short-lived. Concerns about weak U.S. labor data suggest that more rate cuts could be on the way.

The FOMC Meeting

The Federal Open Market Committee (FOMC) will meet on September 16-17. In past meetings, they discussed market rate-cut expectations and the Fed Chair’s role in ensuring independence, dollar stability, and low inflation. With the FOMC meeting starting tomorrow, the market is almost certain of a rate cut. Fed funds futures show a 98% likelihood of a 25-basis-point cut this week. This high certainty means the market’s initial reaction may mislead those who are not prepared. We see a chance for a short-term rise in the dollar if the Fed’s statement is less dovish than expected. Traders might want to buy short-term call options on the U.S. Dollar Index (DXY) to take advantage of a potential quick spike. This strategy could benefit those who are disappointed by the lack of promises for quick, significant cuts.

The Strategy Ahead

Despite the potential rise, we expect the dollar’s strength to be short-lived due to weak economic data. The August jobs report showed only 135,000 jobs added, which is below the 170,000 forecast, and the unemployment rate rose to 4.1%. This information supports the case for more rate cuts down the line. The Fed has room to respond, especially after last week’s CPI data showed core inflation at a two-year low of 2.8%. This situation is reminiscent of the rate-cutting cycle that began in mid-2019, where initial adjustments led to several cuts as economic conditions weakened. We anticipate a similar trend could continue through 2026. As a result, the smarter move may be to use any dollar strength post-meeting as a chance to adopt bearish positions for the weeks ahead. This could include selling call options during the rally or purchasing longer-dated put options on the dollar. The ongoing challenges from a slowing economy and a confirmed easing cycle are likely to overshadow any unexpected hawkish signals this week. Create your live VT Markets account and start trading now.

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