TD Securities has changed its forecast for the US Federal Reserve, now expecting no interest rate cuts in 2026. It still expects the next FOMC move to be a cut rather than a rise.
The firm expects core CPI and PCE inflation to end 2026 higher than at the start of the year. It links this to oil prices staying high and supply chains remaining under strain, with the Iran conflict described as being in a stalemate.
Market Repricing And Rate Cut Expectations
It expects the June Summary of Economic Projections to shift in a more hawkish direction. It also expects the FOMC statement in June to remove its easing bias.
TD Securities said the Fed staying on hold would reduce its negative view on the US dollar. Even so, it continues to forecast a gradual fall in the dollar during 2026, citing Iran-related risks and comparisons with other central banks’ stances.
Given the high likelihood that the Federal Reserve will not cut rates in 2026, derivative traders should adjust their interest rate expectations. The market has been rapidly repricing, with CME’s FedWatch tool now showing a near-zero probability of a rate cut by year-end, a stark reversal from just a few months ago. This means strategies that bet on lower rates, such as holding long positions in December SOFR futures, now carry significant risk.
The persistence of inflation is the primary driver behind this shift. The latest CPI report for April showed core inflation remains elevated at 3.6%, proving stickier than many had hoped earlier in the year. We saw a similar pattern in 2023, when initial optimism about disinflation was repeatedly met with stubborn data, forcing the Fed to maintain its restrictive stance.
June Fomc And Volatility Implications
The upcoming June FOMC meeting is now a critical event, where we expect the committee to officially drop its easing bias from its statement. This hawkish pivot will likely increase market volatility from its current subdued level, with the VIX hovering around 14. Traders may consider buying options to protect against or profit from a sharp market reaction to the Fed’s new, more aggressive language.
For the US Dollar, this means that outright bearish bets are no longer prudent. The Dollar Index (DXY) has found strong support around the 106 level, but with other global central banks remaining hawkish, its upside may be limited. This situation could be favorable for range-bound strategies or pair trades, such as selling the USD against currencies whose central banks are signaling further tightening.
The ongoing geopolitical tensions with Iran are a key reason for this inflation, keeping WTI crude oil prices firmly above $95 a barrel and stressing supply chains. This continues to feed into higher costs for goods and energy, directly impacting the inflation numbers the Fed is watching. Positions in commodity derivatives that benefit from sustained high oil prices could act as a hedge in this environment.
