The US Dollar Index dropped to about 98.90 during the early hours of Monday’s Asian session. Expectations are rising for a 25 basis point rate cut at the Federal Reserve’s December meeting. The chance of this rate cut surged to nearly 90% from 71% in just one week. In addition, US Consumer Sentiment has improved for the first time in five months, rising to 53.3 in December from 51.0.

Traders Eager for Fed Guidance

Traders are looking forward to hearing from Fed Chair Jerome Powell for direction on future rate decisions. Positive sentiment could help limit the decline of the US Dollar. The US Dollar is the official currency of the United States and the most widely traded currency in the world, making up over 88% of global foreign exchange transactions. The Federal Reserve’s decisions greatly affect the dollar’s value, especially through changes in interest rates. The Fed uses these changes to manage inflation and employment levels. Quantitative easing involves the Fed purchasing government bonds, which typically leads to a weaker US Dollar. On the other hand, quantitative tightening means stopping these purchases, which often strengthens the Dollar.

Market Expectations for Fed Rate Cut

With the US Dollar Index sitting below 99.0, it’s clear the market has priced in about a 90% chance of a Fed rate cut this Wednesday. This high probability suggests much of the dollar’s potential decline is already reflected in current prices. Now we need to focus not just on the cut itself, but on what might happen afterward. We should be careful about betting more against the dollar since this trade is becoming crowded. A surprise could come from Fed Chair Powell’s press conference; if he indicates this is a “one-and-done” cut due to recent positive signs like the rise in Consumer Sentiment, the dollar could rally sharply. When the Fed changed policies in late 2023, markets initially overshot rate cut expectations, leading to a bounce-back rally when the Fed pushed back. Given the uncertainty surrounding the Fed’s guidance, we might explore strategies that profit from a spike in volatility. Options strategies like a long straddle or strangle on DXY futures or popular currency pairs like EUR/USD could work well. These positions would benefit from significant price movements in either direction after Wednesday’s announcement, allowing us to avoid guessing the Fed’s tone. We should also keep an eye on key currency pairs, particularly USD/JPY, where interest rate differences play a crucial role. While the Fed is expected to cut rates, the Bank of Japan has kept its very loose policy throughout 2025, which has pressured the yen. A clear dovish shift from the Fed could finally strengthen the yen by closing the gap between US and Japanese government bond yields. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now