**Federal Reserve’s Dual Mandate** Federal Reserve Governor Stephen Miran is looking forward to data that could support further rate cuts. He believes the Fed should lower rates by more than 100 basis points this year. He mentioned that inflation is getting close to the Fed’s 2% target and that a strict policy could slow down economic growth. Miran also pointed out that fiscal policy will help boost growth and shared a positive outlook for the economy this year. Following his remarks, the US Dollar Index fell from session highs, stabilizing at around 98.37. The Federal Reserve has two main goals: keeping prices stable and ensuring full employment. They mainly do this by adjusting interest rates. When inflation goes above 2%, the Fed raises rates, making the US Dollar more attractive. On the flip side, if inflation is low or unemployment is high, they lower rates, which may weaken the Dollar. In extreme situations, the Fed might use Quantitative Easing (QE) to increase the flow of credit by purchasing bonds, which usually weakens the Dollar. Conversely, Quantitative Tightening (QT) occurs when the Fed stops buying bonds, which helps the Dollar’s value. The Federal Open Market Committee meets eight times a year to guide these policies. **Fed’s Aggressive Policy Easing** There’s a clear signal from the Federal Reserve for considerable policy easing this year. A call for cuts exceeding 100 basis points suggests that the current restrictive approach is damaging the economy. This perspective aligns with the latest Core PCE inflation rate, which stands at 2.2% year-over-year, very close to the Fed’s goal. Given this outlook, we need to adjust our strategies in interest rate derivatives to expect a decline in the yield curve. We should focus on strategies that benefit from decreasing short-term rates, such as buying SOFR futures contracts for the second half of 2026. After navigating through high rates in 2025, this change signals important trading opportunities in the coming months. Historically, a dovish Fed tends to weaken the US Dollar, and we’re already seeing the Dollar Index pull back from its peaks. We should plan for a broader decline in the dollar since the market had only anticipated about 75 basis points of cuts before these comments. Consider derivative strategies like buying call options on pairs like EUR/USD, which is currently struggling below 1.1700 and might be on the verge of a breakout. For equity markets, lower borrowing costs are a significant boost that we’ve been waiting for. Major indices, which largely remained stable in late 2025, could experience renewed buying interest. We might want to sell put options on the S&P 500 or buy call options in sectors sensitive to rates, like technology and housing. This change in tone is likely to increase volatility around upcoming economic data, particularly the next employment report and CPI reading. Last month’s Non-Farm Payrolls number was 155,000, slightly below expectations, and another low figure would support quicker cuts. We should be ready for sharp market movements as traders reevaluate the entire monetary policy path for 2026. Create your live VT Markets account and start trading now.

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