Paul Donovan of UBS notes that all 92 economists surveyed predict no change in US interest rates. An insurance rate cut might be explored to boost consumer spending, but it’s not urgent. President Trump’s social media comments on the US Dollar have minimal impact on inflation. Most company leaders do not adjust pricing based on currency changes, even with possible tariff worries.

Federal Reserve Considerations

The Federal Reserve is unlikely to consider Trump’s remarks about future tariffs and inflation. Bonds seem to respond more to a weakened dollar than to inflation issues. Market forecasts indicate that interest rates will remain steady, supported by solid growth and ongoing inflation. The Bank of Canada is also expected to keep its key rate at 2.25%. In currency markets, the EUR/USD and GBP/USD pairs are falling as the US Dollar strengthens. Gold prices are rising due to safe-haven demand amid economic and geopolitical uncertainties. This article is part of a collection curated by the FXStreet Insights Team, featuring market insights from recognized experts. The team provides expert-driven insights and additional analysis from internal and external analysts.

Market Expectations

We do not expect surprises from the Federal Reserve today, as the market has fully anticipated the decision to keep interest rates unchanged. The key focus is on the potential for an “insurance” rate cut later this year to support consumer spending. This suggests that near-term options on equity indices may be overpriced, as the immediate trigger for a spike in volatility is now gone. The possibility of a future rate cut directly relates to consumer health, which showed signs of weakness in late 2025. Retail sales figures for Q4 2025 fell below expectations, growing at the slowest pace in over a year. As a result, derivatives betting on a rate cut by the third quarter, like SOFR futures, could present an opportunity if upcoming job data indicates any weakness. We agree that recent comments encouraging a weaker US Dollar currently have limited inflation effects. Indeed, the latest Consumer Price Index (CPI) data from December 2025 reported core inflation at a two-year low of 2.9%. This suggests that companies are absorbing currency fluctuations instead of passing those costs onto consumers. Therefore, using options on currency pairs like EUR/USD may be a more effective strategy than trading inflation swaps. The more substantial risk posed by a falling dollar relates to the bond market, not inflation. A weaker dollar makes U.S. Treasury bonds less appealing to foreign investors, which may drive yields higher. Recent Treasury data showed a significant decrease in foreign purchases of U.S. debt, a trend that could pressure bond prices. Buying protective puts on long-duration bond ETFs could be a wise hedge in the weeks ahead. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now