The Federal Open Market Committee (FOMC) of the Federal Reserve is facing significant internal disagreements about future monetary policy, as shown in a recent meeting. Fed Chair Jay Powell mentioned differing views on interest rate changes. Some members want to cut rates further, while others prefer to keep them steady. Stephen Miran backed a cut of 50 basis points, while Kansas Fed President Jeffrey Schmid wanted no changes at all. The likelihood of a December interest rate cut is unclear, which is different from what the market expected based on Fed Funds Futures. This has led to a surprising hawkish outlook, causing the US dollar to strengthen. Despite the uncertainties, a December rate adjustment now seems more possible, which has contributed to the recent strength of the currency.

Labor Market Data And Decisions

Without solid labor market data, some central bankers, including Miran, are leaning towards rate cuts. However, they are cautious about making decisions without complete information. The future stance of FOMC members is still uncertain, making it hard to predict further appreciation of the USD. It’s wise to be careful in forecasting before the next meeting, given the current lack of data. Yesterday’s meeting of the Federal Reserve changed our expectations. The market had anticipated a December interest rate cut, but the deep divisions within the FOMC now make that outcome uncertain. The dollar strengthened immediately after the meeting, and futures markets indicate that the probability of a December cut has dropped from over 70% last week to below 40% now. The main issue is the current lack of data, especially official labor market figures. Without this important information, the Fed is reluctant to make a firm decision. This is why implied volatility on major currency options surged to its highest level in three months. In this environment, making straightforward bets on the dollar is very risky until we have more clarity.

Volatility And Market Strategy

In the coming weeks, buying volatility seems to be the best strategy. We should consider purchasing options, like straddles or strangles, with expiration dates after the December FOMC meeting to take advantage of a significant price movement, regardless of its direction. This way, we can benefit from the eventual resolution of the Fed’s current indecision. This situation feels reminiscent of late 2018, when the Fed had to shift quickly from a hawkish to a dovish stance due to changing data. With Q3 GDP growth at a solid 2.5% and the latest CPI inflation remaining stubbornly high at 3.5%, both hawks and doves at the Fed have valid arguments. The upcoming jobs report will be a crucial piece of data that could determine the direction of the FOMC’s decisions. Create your live VT Markets account and start trading now.

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