The US Dollar has stabilized after a recent decline linked to political threats against the Federal Reserve’s independence. These threats reduced the Fed’s credibility in controlling inflation, putting pressure on the Dollar. However, updated expectations for US interest rates, fueled by positive economic data, are currently supporting the USD, according to BBH FX analysts. New York Fed President John Williams announced that the Fed’s policy remains steady, focusing on supporting the labor market and inflation goals. He predicts GDP growth of 2.5%-2.75% for 2026 and expects inflation to peak at around 2.75%-3.0% in the first half of this year before declining, while unemployment rates remain stable.

Fed Funds Futures Outlook

Fed funds futures show low chances of a rate cut in the coming Federal Open Market Committee (FOMC) meetings, with the first possible cut expected in June. The focus is also on the upcoming US December Consumer Price Index (CPI), anticipated to be 2.7% year-over-year, with a slight increase in core inflation. The Cleveland Fed model aligns, projecting a CPI of around 2.6%. Lower price pressure risks may create space for the Fed to ease policy. ISM indexes indicate easing inflation pressures, and hourly wage growth (3.8% year-over-year) meets the Fed’s 2% target, supported by 2% growth in nonfarm productivity. However, political pressure on the Fed adds a layer of volatility, even if it’s just background noise for now. This could mean that implied volatility on dollar-related options might be underestimated, which could be a good opportunity. We should consider options on major currency pairs to position ourselves for wider price movements in the coming weeks. With the Fed signaling a pause, we don’t expect major shifts in short-term interest rate futures until the second quarter. The June 2026 contracts are where the market is pricing the first real chance of a rate cut, making them crucial to watch. Significant economic data will directly influence the pricing of this contract.

Market Comparisons

This situation resembles what we experienced in 2024, when strong economic data kept the Fed on hold despite hopes for quick rate cuts. Recent numbers for 2025 confirmed that core inflation ended at 3.9%, which was higher than expected, while GDP growth stayed strong above 3%. This underlying economic resilience explains the Fed’s cautious approach to cutting rates and why the dollar receives support on dips. Currently, the mixed signals of a cautious Fed and a strong economy suggest that the US Dollar will remain within a defined range. This environment favors option-selling strategies that benefit from time decay and limited price movement. The main risk to this outlook is an unexpectedly high inflation report, which could lead to a sharp change in Fed expectations and push the dollar out of its current range. Create your live VT Markets account and start trading now.

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