Federal Reserve Bank of Kansas City President Jeffrey Schmid talked about inflation at the Economic Club of Kansas City. He prefers to keep a moderately strict monetary policy. He warned that lowering interest rates could worsen inflation and wouldn’t significantly help employment. The Consumer Price Index for December shows inflation around 3%. Current monetary policy isn’t very strict, but it reflects ongoing economic momentum. Schmid pointed out that rate cuts won’t solve structural problems in the labor market.

Economic Dynamics and Currency Performance

Tax policies and deregulation could help boost investment, spending, and demand, so we can’t ignore inflation. Today, the US Dollar rose against the British Pound, which dropped by 0.05% overall, while other currencies fluctuated against each other. The Euro fell 0.26% against the US Dollar, while the Japanese Yen rose 0.05% compared to the US Dollar. The Canadian Dollar weakened by 0.08% against the US Dollar, and the Australian Dollar gained 0.30% against it. The Federal Reserve seems set on a restrictive monetary policy. The December 2025 Consumer Price Index (CPI) shows inflation stuck at 2.9%, indicating that we won’t see a policy shift soon. This reinforces that inflation is the main concern for the central bank, making rate cuts in the first quarter of 2026 unlikely.

Interest Rate Futures and Market Implications

In response, interest rate futures are being significantly repriced. The derivatives market data from the CME Group shows that the chance of a rate cut before the second half of the year is almost gone. This is a big change from late 2025, when many traders expected earlier and bigger rate cuts. This situation continues to support the US Dollar, which is strong against currencies like the British Pound. We might want to consider long-dollar positions through options, such as buying USD calls against currencies from central banks that are more dovish. This strategy can provide an opportunity for dollar gains while limiting risk. For equity index derivatives, this means a tough environment for rate-sensitive sectors. High interest rates could slow down growth, similar to the impact we saw in 2023 when the first rate hikes were implemented. We might think about buying VIX call options, as the index is currently around 18, to protect against possible market volatility. This outlook could also be challenging for non-yielding assets like gold. A strong dollar and high real yields make gold less appealing, which might lower prices in the coming weeks. We should be cautious with long gold futures until there’s a clear change in Fed policy or an increase in geopolitical risks. Create your live VT Markets account and start trading now.

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