In September, the Federal Reserve cut rates by 25 basis points, which boosted the US Dollar (USD). This rally surprised many traders who were betting against the dollar and reacted to some hawkish remarks from Powell. Today, however, things look different for a potential rate cut. Currently, markets expect a 25 basis point cut, with another possible reduction in December. But USD positioning seems more balanced now, according to data from the options market, even though the CFTC data is temporarily unavailable due to a government shutdown.

Current Economic Indicators

Recent US economic data, including mild CPI figures and signs of a weakening job market, indicate that Powell has little reason to take a more hawkish approach. While there might be some upside risks for the USD, any increase is likely to be minor and short-lived, especially with the end of Quantitative Tightening (QT) potentially limiting the dollar’s gains. Today’s Fed meeting is expected to announce a 25 basis point rate cut, similar to the September 2025 cut. That cut unexpectedly pushed the Dollar Index (DXY) up by 1.5% in just two days, surprising traders with hawkish comments. However, this time, we expect a much softer reaction in the following weeks. One of the biggest changes from September is how traders are positioned. Back then, many speculators were shorting the dollar, leading to a rally driven by short covering. This time, data from the options market shows a more balanced positioning, with 3-month risk reversals nearing zero. Chairman Powell likely has no reason to adopt a hawkish tone, which is necessary for a significant dollar rally. The latest CPI data for September 2025 showed a modest 2.8% year-over-year increase, and weekly jobless claims are hovering above 230,000, indicating a softer labor market. Thus, we can expect Powell’s remarks will focus more on managing economic slowdowns rather than combating inflation.

Strategy for Derivative Traders

For derivative traders, this situation suggests they should be cautious about buying significant upside protection on the dollar. Any rally after the meeting is expected to be brief and shallow, so it’s better to sell into strength rather than chase it. The possible announcement to end Quantitative Tightening (QT) may enhance liquidity, posing additional challenges for the dollar. This scenario resembles market behavior from late 2022, when the dollar index hit a peak even while the Federal Reserve was aggressively raising rates. Back then, the market had already priced in peak hawkishness, which might now be reversing with upcoming rate cuts. Therefore, a wise strategy could involve selling DXY call options or setting up bearish risk reversals in the coming weeks. Create your live VT Markets account and start trading now.

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