In September 2024, the Federal Reserve lowered interest rates by 50 basis points to tackle concerns about a slowing labor market and disinflation. They projected two more cuts by the end of the year and two additional cuts for the next year. However, the market anticipated three cuts by year’s end and four more the following year. Strong US data and a robust Non-Farm Payroll (NFP) report in October led to hawkish changes in the market, driving a rally in the US dollar and rising Treasury yields. By September 2025, the Fed cut rates again by 25 basis points because the labor market continued to slow, while inflation rose. They predicted two additional cuts by year-end and one more the next year, but the market was priced for nearly three cuts in the following year. After the Fed’s decision, lower-than-expected US jobless claims pushed Treasury yields and the US dollar higher. Upcoming US economic data, including PMIs, Jobless Claims, and the NFP report, will be crucial. Strong data could lead to a hawkish shift in interest rates, benefiting the US dollar and Treasury yields, while weak data might reinforce the market’s current views, putting pressure on the dollar and yields.

The Market’s Aggressive Projections

We’ve seen this before, with a clear divide between our forecasts and the market’s aggressive predictions for rate cuts. Following the Federal Reserve’s 25 basis point cut this week, the market is betting on nearly three full cuts for 2026. This is despite recent Core PCE inflation for August 2025 staying stubbornly above 3%, complicating future decisions. Looking back to September 2024, the market expected more cuts than the Fed projected, only to be surprised by strong economic data. The October 2024 Non-Farm Payrolls report exceeded expectations at over 240,000, causing a rally in the dollar and a spike in Treasury yields as dovish bets were reversed. We may be experiencing a similar situation now. Just yesterday, weekly jobless claims were reported at 205,000, well below the expected 220,000. This indicates strength in the labor market, directly challenging the market’s dovish outlook and suggesting that the economy is more resilient than anticipated.

Potential Strategies for Traders

Given this situation, traders should consider positions that would benefit from a hawkish repricing in the coming weeks. This could involve buying call options on the U.S. Dollar Index or purchasing put options on Treasury futures, anticipating rising yields. Key events to watch will be the upcoming ISM PMI data and the September jobs report on October 3rd. If the data confirms a strong economy, the market may need to adjust its aggressive rate cut expectations, similar to last year. This could lead to significant gains for the dollar compared to other major currencies and higher bond yields. However, if the data weakens unexpectedly, it may validate the market’s view and continue to pressure the dollar. Create your live VT Markets account and start trading now.

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