The US Dollar Index is stabilizing around 97.90 after recovering some earlier losses. Expectations of two rate cuts by the Federal Reserve in 2026 are influencing its performance, while holiday trading volumes remain low. On Wednesday, US Treasury yields for 2- and 10-year notes rose to approximately 3.53% and 4.16%, respectively. Even with stronger-than-expected economic data, market sentiment points towards future rate cuts, which could impact yields.

US Economic Growth and Interest Rates Outlook

In the third quarter, the US GDP grew by 4.3%, beating the predicted 3.3% and the previous quarter’s 3.8% growth. The core PCE Price Index increased by 2.9%, aligning with forecasts. White House Adviser Kevin Hassett emphasized the need for the Fed to act quickly on interest rate cuts. Stephen Miran from the Federal Reserve Board raised concerns about the risk of recession if policies remain unchanged. He noted that the need for significant rate reductions decreases over time as rates are lowered. The US Dollar is the world’s most traded currency, with a daily turnover averaging $6.6 trillion in 2022. Its value is significantly affected by the Federal Reserve’s actions, including interest rate changes and quantitative easing. Conversely, quantitative tightening can strengthen the Dollar by halting bond purchases. With the US Dollar Index steady near 98.00, the market stands at a crossroads as we approach the new year. Holiday trading has reduced volumes, meaning that significant news could lead to larger market swings in the coming weeks. This low liquidity creates both risks and opportunities for short-term trades.

Market Sentiment and Monetary Policy

There is a clear conflict between strong economic data from the third quarter of 2025 and increasing expectations for Federal Reserve rate cuts in 2026. The reported 4.3% GDP growth seems to be overlooked by the market, which focuses instead on future monetary policy and a potentially slowing economy. Recent data showing a decline in inflation supports this forward-looking sentiment. The November 2025 Consumer Price Index (CPI) report indicated a 2.7% year-over-year increase, reinforcing the belief that the Fed can ease its policies. Consequently, the CME FedWatch Tool now suggests over a 70% chance of at least two rate cuts by the end of 2026. The recent rise in Treasury yields, with the 2-year at 3.53% and the 10-year at 4.16%, should be viewed cautiously. We believe this is a short-lived reaction, making strategies that profit from falling yields, like options on Treasury futures, appealing. The political pressure from the White House and dovish remarks from Fed members strengthen this view. Right now, the VIX index, which measures volatility, is close to a low of 13, indicating some market complacency. This moment could be ideal for buying protection or making speculative bets with options. We see it as a chance to buy put options on the US Dollar Index, preparing for a decline as expectations for rate cuts grow stronger in early 2026. This situation is similar to late 2023 when markets began anticipating rate cuts for 2024 even before the Fed signaled a shift. Traders who positioned themselves early in that easing cycle reaped significant rewards. We believe the same opportunity is presenting itself now, where it’s beneficial to predict the Fed’s future moves rather than simply react to its current stance. Create your live VT Markets account and start trading now.

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