The US Dollar went up because investors feel positive about the Federal Open Market Committee’s last meeting of the year. Economic reports, including the ADP report and JOLTS readings, also helped the dollar strengthen. On December 10, the USD reached close to five-day highs around 99.30, backed by a rise in US Treasury yields. The Fed’s interest rate decision is expected to be crucial, along with upcoming reports about mortgage applications, employment costs, and crude oil stockpiles.

Euro and Pound Under Pressure

EUR/USD struggled, falling for the fourth day in a row. Attention is on speeches from ECB officials since there are no major domestic data releases. GBP/USD dropped below 1.3300, even with strong comments from the BoE, as everyone awaits the RICS House Price Balance report. USD/JPY kept climbing, nearing 157.00, ahead of the Reuters Tankan Index and Producer Prices report. AUD/USD bounced back from a decline on Monday, helped by the RBA’s careful approach, with a jobs report coming up. WTI oil prices dipped to multi-day lows around $58.00 per barrel, influenced by peace talks between Russia and Ukraine and the Fed meeting. In contrast, gold and silver prices increased, with gold hitting $4,200 per troy ounce and silver exceeding $60.00 for the first time. With the Federal Reserve’s last meeting of the year approaching, everyone’s eye is on the US Dollar. Recent strong jobs data, like the JOLTS report showing over 9.2 million job openings last month, supports a hawkish outlook from the central bank. We expect the US Dollar Index (DXY) to test its 200-day moving average, an important technical level that could indicate more strength moving into early 2026.

Monetary Policy Divergence

Given the dollar’s momentum, there are opportunities in options on currency pairs like EUR/USD. This pair is testing its 55-day average near 1.1600, and a hawkish Fed could cause it to drop, especially as the European Central Bank takes a cautious approach. The key strategy is to buy put options to benefit from a potential decline while minimizing upfront risk before the announcement. The most significant monetary policy divergence is with the Japanese Yen, as USD/JPY approaches 157.00. In 2023, we saw similar trends when the interest rate gap between US and Japanese government bonds widened, pushing the pair to record highs. The US 10-year Treasury yield is now above 4.75%, while Japanese 10-year yields linger around 1.0%, making long positions in USD/JPY appealing. In the commodities market, low oil prices near $58 per barrel create a complicated situation. While decreasing geopolitical tensions play a role, the Fed’s decision might lower demand forecasts, driving prices further down. The recent EIA report showing a surprising increase in crude oil inventories of 2.1 million barrels supports this bearish outlook, indicating we can use options to bet on more declines. The rise in precious metals presents a major contradiction, suggesting that inflation fears remain strong despite the Fed’s actions. Gold is holding above $4,200 an ounce while the dollar is strong, which is unusual and reminiscent of the economic challenges of the late 1970s. We should maintain positions in gold and silver as a way to protect ourselves against the possibility that the Fed is still lagging on inflation. Overall, we can expect increased market volatility after the Fed meeting. The VIX index, which measures anticipated market volatility, has risen above 20 this week in preparation for the event. The smartest strategy is to use derivatives that can profit from significant price swings, like straddles on major indices and currency pairs, regardless of which way the market moves. Create your live VT Markets account and start trading now.

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