A recent Reuters poll shows the Federal Reserve may cut interest rates by 25 basis points to between 3.50% and 3.75% at its meeting on December 10. Out of 108 economists surveyed, 89 expect this decrease. Looking ahead, some economists forecast that by the first quarter of 2026, the Fed could lower the fed funds rate further to between 3.25% and 3.50%. This prediction comes from 50 out of 100 economists. These expectations have influenced the market, with the Dollar Index rising slightly by 0.02%, even after five days of losses.

The US Dollar’s Performance

The US Dollar has shown strong performance against major currencies, particularly against the New Zealand Dollar. It rose by 0.09% against the Japanese Yen and 0.10% against the Australian Dollar. However, it fell by 0.15% against the Canadian Dollar. There were no changes against the British Pound and Swiss Franc. The Euro saw a slight decline of 0.01%. This data reflects current trends in foreign exchange as we consider potential policy changes. With a 25 basis point rate cut expected on December 10, this move is already factored into the market. The CME FedWatch Tool shows over a 90% probability for this decision, making the Fed’s future guidance particularly important. The main question is if the official statement will indicate more cuts soon.

Market Reactions and Strategies

The US Dollar’s recent five-day decline suggests that traders have been selling it in anticipation of lower rates. This scenario resembles what occurred in 2019 when the Fed implemented a “mid-cycle adjustment,” leading to a weaker dollar in the following months. Unless the Fed surprises with a more hawkish stance, the dollar’s likely direction remains downward. November 2025 data revealed a Core PCE inflation rate cooling to 2.8% and a slowdown in Non-Farm Payrolls growth, supporting the case for further rate cuts. We are preparing for another Fed cut in the first quarter of 2026, making futures contracts linked to the March 2026 meeting critical for understanding market sentiment. For equity derivatives, this outlook is favorable since lower interest rates generally enhance stock valuations. The S&P 500 has already increased by over 3% in the past month, suggesting that traders are anticipating this policy shift. We expect a decline in implied volatility, as measured by the VIX, if the Fed meets expectations without major surprises after the announcement. In the currency options market, we’re observing high implied volatility for major pairs like EUR/USD and USD/JPY ahead of the meeting. This situation creates opportunities for strategies that benefit from a post-announcement volatility drop, such as selling strangles. Traders anticipating a sustained dollar decline are considering call options on the Euro, particularly since the European Central Bank is keeping rates steady. Create your live VT Markets account and start trading now.

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