Isabel Schnabel from the European Central Bank has impacted global interest rate markets. Traders are reevaluating expectations for future Fed easing, leading to a 4-5 tick drop in Fed Funds futures for late 2026. The Fed’s terminal rate for next year has increased by 20 basis points to 3.13% in the past two weeks.

US Growth Stocks Impact

The rise in US rates has affected growth stocks, as their discounted cash flows are recalibrated. Even with Schnabel’s remarks, some doubts about their true hawkishness persist. The news has also influenced the EUR/USD exchange rate, where the Fed’s easing cycle plays a crucial role. Expectations for a ‘hawkish cut’ at the upcoming FOMC meeting are noteworthy. Before the FOMC meeting, market attention will shift to US JOLTS data, which is anticipated to show a slowdown. The ongoing market expectation for Fed easing seems fragile, indicating limited risks for the dollar. If today’s data surpasses expectations, the DXY might reach 99.30. Recent comments from the European Central Bank have prompted shifts in global interest rate markets. This has led us to rethink why the market is anticipating a significant Fed easing of 90 basis points. Consequently, the expected Fed terminal rate for next year has jumped by 20 basis points to 3.13% in just two weeks. This reevaluation follows strong economic data, which provides the Federal Reserve less incentive to signal aggressive future cuts. For instance, the jobs report from December 5, 2025, revealed the economy added 190,000 jobs in November, exceeding expectations. Additionally, the latest Consumer Price Index data shows persistent inflation at 3.2%, arguing for a more cautious approach from the Fed. With the Federal Open Market Committee meeting tomorrow, the market is now predicting a ‘hawkish cut.’ This implies a possible rate reduction, but the accompanying messaging will likely indicate fewer future cuts than previously thought, limiting potential downside for the U.S. dollar leading up to the decision.

Derivative Traders Strategies

For derivatives traders, this outlook suggests it may be wise to buy short-dated call options on the Dollar Index (DXY). Any unexpected positive data from today’s JOLTS job openings could push the DXY, currently around 98.80, up to 99.30. This could make call options profitable while mitigating risks if the data comes in weaker than expected. We’ve already witnessed a sell-off in Fed Funds futures contracts for late 2026, which may continue. This trend suggests that positions betting on a slower rate cut pace, like selling SOFR or Fed Funds futures, might perform strongly. These trades reflect the view that the market has been overly optimistic about the level of Fed easing in 2026. Reflecting back, the market’s demand for rate cuts stemmed from the aggressive rate hikes we experienced throughout 2023. That tightening phase was expected to lead to a more pronounced economic downturn than what has materialized. Now, the unexpected resilience of the U.S. economy is compelling the market to adjust its expectations. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now