A recent poll by Reuters shows that 115 out of 117 economists expect the Federal Reserve to cut interest rates by 25 basis points, bringing them to a range of 3.75%-4.00% on October 29. For the year, 83 economists think there will be two more rate cuts, while 32 believe there will be just one more. However, 25 out of 33 economists worry that the risk is setting rates too low as the cycle ends. Despite this speculation about rate cuts, the US Dollar Index—which measures the dollar against six major currencies—has actually increased by 0.35%, approaching 98.95.

Monetary Policy Implications

The Federal Reserve manages US monetary policy to achieve price stability and full employment by changing interest rates. Higher rates strengthen the US Dollar, drawing in foreign investment, while lower rates encourage borrowing. The Fed meets eight times a year, with the Federal Open Market Committee making decisions on monetary policy. Quantitative Easing boosts credit availability by purchasing bonds, which can weaken the US Dollar. On the other hand, Quantitative Tightening—when the Fed stops buying bonds—usually benefits the dollar’s value. With a cut in interest rates almost certain for October 29, the market has already factored this into prices. People are looking ahead to what the Federal Reserve will indicate for their December meeting and into 2026. As a result, the actual rate cut may not significantly impact directional trading. Interestingly, the US Dollar Index is gaining strength despite the expected cut. This suggests that traders are focusing on relative economic strength. New data indicates that the Eurozone is facing a possible recession, especially after weak factory orders in Germany, while the US economy appears more robust. The dollar isn’t trading in isolation; it is being bought because other major economies may need to ease their policies even more aggressively.

Currency Market Dynamics

Our economic data presents a mixed view that contributes to this uncertainty. Third-quarter GDP growth was only 1.5%, which supports the Fed’s actions, but the recent September CPI report shows inflation stubbornly holding at 3.4%. This means the Fed has limited room for significant cuts, helping to keep the dollar strong for now. For traders dealing in derivatives, this situation suggests that focusing on market volatility might be more beneficial than simply betting on the dollar’s direction. As the major price movement will likely come from the Fed’s statements rather than the rate cut itself, options strategies that benefit from significant swings in either direction could be valuable. For instance, buying a straddle on the EUR/USD during the announcement could capitalize on the market’s response to any unexpected guidance. We’ve seen similar trends in the past, like in 2019, when the dollar gained strength even as the Fed lowered rates because it was viewed as the “least dovish” central bank. The biggest risk to the dollar’s current strength arises if the Fed’s statement hints at more than the expected two rate cuts this year, making long-dated put options on the dollar a sensible hedge against any sudden policy changes. Create your live VT Markets account and start trading now.

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