Expectations for Rate Cuts

The Federal Open Market Committee (FOMC) is meeting for two days, and the US dollar is close to its lowest point since 2022. There’s a chance of a 50 basis points cut, but traders are expecting a cut of 68 basis points for 2025. The US dollar index keeps falling, especially against the euro, Swiss franc, and yen. The euro has risen above its July high, now trading at 1.1873—an increase of 113 pips today. People are worried that the Federal Reserve might not clearly signal another rate cut. Jerome Powell might use the press conference to highlight that inflation is still not at the 2% target, and caution is needed due to inflation risks from tariffs. If the Fed points out the weak job market, the dollar could drop further. Recent employment reports show disappointing results and significant downward revisions. Powell might stress the importance of not keeping higher rates for too long in order to protect American jobs, potentially lowering rates to about 3% from the current 4.25-4.50% range. The market is ready for a decline in the US dollar as we approach the Federal Reserve’s rate announcement. The US dollar index is close to breaking its July 2025 low, which could bring it to levels we haven’t seen since 2022. If this support level breaks, it could lead to a large sell-off.

Currency and Market Strategies

The euro is leading the way, breaking above 1.1870 and reaching its highest level this year. We’ve been tracking this currency pair, and the recent movement suggests that the next big target is the psychological level of 1.2000. This breakout makes the euro an attractive option to trade against the dollar. For those trading derivatives, this environment favors buying call options on the euro or put options on the US dollar index. This strategy allows us to benefit from the expected weakness of the dollar while limiting our risk before the central bank’s announcement. The implied volatility around the FOMC meeting will raise options prices, but it also shields against sudden market reversals. Expectations of a dovish Fed are supported by recent economic data. For instance, the August 2025 Non-Farm Payrolls report showed the economy added only 95,000 jobs, missing predictions, with the previous month revised lower. With the August core CPI inflation figure steady at 2.8%, the Fed has a strong reason to focus on supporting job growth. However, there’s a risk that Fed Chair Powell might surprise the market with hawkish comments about persistent inflation or the recent 2% rise in oil prices. He may emphasize that the fight against inflation isn’t over, which could lead to a quick rebound in the dollar. This possibility makes using options with limited risk a wiser choice than directly shorting futures. Looking at the bigger picture, the long-term trend for the dollar seems to be downward. The market expects a continued rate-cutting cycle into 2026, especially if there’s a change in Fed leadership soon. This means any dollar strength in the coming weeks could be a good chance to set up long-term bearish positions. Create your live VT Markets account and start trading now.

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