Societe Generale expects a mildly restrictive Federal Reserve stance and possible hawkish changes to the Summary of Economic Projections (SEP) to support the US dollar versus G10 and emerging market currencies. It places the current US upper policy rate at 3.75% and notes the US is less exposed to an oil supply shock as an energy exporter. The bank says the Fed’s dual mandate keeps attention on inflation and jobs, and it sees the median 2026 dot plot still implying one rate cut in its base case. It also flags a 4-sigma spike in oil prices as a factor the Fed may need to assess.

Dollar Support From A Restrictive Fed

It reports that Miran and Waller are likely to dissent again and prefer a rate cut, and it says the dollar could react if either withdraws a dovish position. It expects Chair Powell’s press conference to stay close to prior messaging, with policy seen as appropriate and future cuts depending on further labour market weakness. It identifies an “outside risk” that the 2026 PCE inflation forecast could be revised up from 2.4%, leading the FOMC to remove the single projected cut. It says this could lift USD/G10 and USD/EM and shift the Treasury curve from bull flattening to bear flattening. It adds that Jan Groen has revised his forecast to no change in 2026 and two cuts in 2027 due to a higher inflation path. The article notes it was produced with AI assistance and reviewed by an editor. The Federal Reserve’s current policy rate is seen as mildly restrictive, which should continue to support the US Dollar. With the Dollar Index holding firm around 105.50, the path of least resistance appears to be higher. This environment favors strategies positioned for continued Dollar strength against other major currencies.

Dot Plot Risks And Curve Implications

The main focus for the upcoming Federal Open Market Committee meeting will be the dot plot and inflation projections for 2026. After a year of anticipating cuts in 2025 that never came, we see a risk that the single projected rate cut for this year could be removed. This would be a hawkish signal for the market to digest. This risk is heightened by inflation that remains stubbornly above target, with the latest Core PCE reading for February coming in at a persistent 2.9%. At the same time, we’re watching the recent surge in WTI crude oil to over $95 a barrel, which complicates the inflation outlook. A potential upward revision of the Fed’s inflation forecast would be the justification for removing the planned cut. However, the Fed must also weigh its full employment mandate. The surprisingly weak February payrolls report, which added only 95,000 jobs and saw unemployment tick up to 4.2%, gives dovish members a strong argument to hold off on any hawkish moves. This tension between sticky inflation and a slowing labor market creates the central uncertainty. For derivative traders, this suggests buying US Dollar call options against the Euro or Yen is a sensible strategy. It provides a defined-risk way to profit from a hawkish surprise if the Fed removes the 2026 rate cut. This positioning allows for upside if the dollar strengthens while capping potential losses if the Fed maintains its current guidance. This potential policy shift would also reshape the Treasury curve, likely causing a bear flattening scenario where short-term yields rise faster than long-term ones. We are considering positions in interest rate futures that would benefit from a narrowing of the spread between the 2-year and 10-year Treasury yields. Create your live VT Markets account and start trading now.

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