### The Federal Reserve’s Policy Rate A Reuters poll of 100 economists shows that the Federal Reserve is likely to keep its policy rate steady at the January meeting, holding it between 3.50% and 3.75%. About 58% of the economists do not expect any changes to the rate in the first quarter. This reflects strong growth expectations and inflation levels above the Fed’s 2% target, which may delay any cuts to the rate. However, two rate reductions are anticipated later in the year. There isn’t a clear agreement on when these rate cuts will happen after the first quarter, but a slight majority think they will occur in June or later, after Jerome Powell’s term as Fed Chair ends. Economists have also slightly raised their forecasts for US growth, now predicting increases of 2.3% for 2026 and 2.0% for 2027, following an expected rise of 2.2% in 2025. The US Dollar Index is nearing a two-week low after three consecutive days of decline. Today, the US Dollar had mixed results against major currencies, performing best against the British Pound. The GBP/USD pair traded around 1.3430, with the Sterling fluctuating after President Trump’s comments at the World Economic Forum. ### Federal Reserve’s January Decision The Federal Reserve is expected to maintain interest rates between 3.50% and 3.75% next week. Short-term rate derivatives reflect this stability. This marks a change from late 2025, when the markets anticipated at least one rate cut by March. The current predictions indicate little change around the January 28th announcement. This decision to hold rates is backed by recent economic data that wasn’t available during the December poll. The latest jobs report revealed a solid increase of 210,000 nonfarm payrolls, and the most recent Consumer Price Index (CPI) shows core inflation at 3.1%, well above the Fed’s target. These strong figures suggest that the central bank may wait before easing its policies. Currently, it seems that markets are reassessing expectations for the first quarter of 2026. After observing the Fed’s cautious reaction to persistent inflation in 2023, it’s clear they are reluctant to cut rates too soon and risk rising prices again. Thus, options strategies betting on a cut in February or March now carry greater risk. Despite the Fed’s decision to hold rates steady, the US Dollar Index is showing weakness, trading around 98.48. This suggests that traders are looking beyond the short-term hold and anticipating rate cuts later this year. The dollar has faced downward pressure since reaching above 102 in the fourth quarter of 2025, and this trend seems to be ongoing. The primary opportunity for derivative traders now lies in the uncertainty surrounding the latter half of the year, especially after Chairman Powell’s term concludes. With economists divided on whether rate cuts will begin in June or later, interest rate futures may experience increased volatility in the summer and fall. This environment could make options strategies that benefit from larger price swings, regardless of direction, more attractive. We are also seeing the dollar’s weakness against currencies like the Australian and New Zealand dollars. Given the updated US and global growth forecasts, there could be opportunities using FX options to position for increased strength in these commodity-linked currencies against the greenback. Recent data indicates that the dollar lost nearly half a percent against both the AUD and NZD just today. Create your live VT Markets account and start trading now.

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