UBS predicts that the Federal Reserve will cut interest rates by 75 basis points by early 2026. Currently, the Fed is paying more attention to the weak labor market than to rising inflation. Jerome Powell mentioned that job demand has decreased. Job creation is falling short of what’s needed to keep unemployment steady. Since May, nonfarm payrolls have averaged just 27,000 per month, leading to a total payroll reduction of 911,000.

Inflation and Tariff Impacts

Despite the struggles in the labor market, the Fed still worries about inflation. Core inflation held steady at 3.1% year-on-year in August. Price increases due to tariffs are expected to be temporary, with the Fed forecasting inflation to hit its target by 2027. These rate cuts could weaken the dollar if other currencies stay strong. We might see lower short-term yields while inflation expectations hold back long-term hikes. An easier monetary policy could support risk assets, but the weak labor market might counter that. Recently, US equity indices have reached all-time highs. Due to the temporary nature of tariff-driven inflation, limited Fed tightening is expected in commodities. The Fed seems more focused on the struggling labor market than on temporary inflation spikes, indicating more rate cuts ahead. With nonfarm payrolls averaging just 27,000 since May 2025 and initial jobless claims at a multi-year peak, traders should expect lower short-term interest rates. This makes buying SOFR or Fed Funds futures a smart move to prepare for potential easing.

Currency and Equity Implications

A weaker dollar is likely, especially if other central banks keep their rates unchanged. The U.S. Dollar Index (DXY) fell below 102 this week, signaling a clear split with the European Central Bank, which just held its policy steady. Traders might want to buy call options on the EUR/USD or AUD/USD to take advantage of this growing difference. For equities, this trend supports the market, despite the challenges from a weak job market. The S&P 500 set a new record high yesterday, but the CBOE Volatility Index (VIX) has risen to 16, indicating some underlying uncertainty. Selling out-of-the-money put spreads on major indices could allow traders to profit from the belief that the Fed will prevent a significant market drop. The idea that tariff-driven inflation is a one-off event lessens a key risk for commodities. A weaker dollar and lower real yields typically favor assets like gold, which has already risen to $2,380 an ounce. This creates an opportunity for long positions in gold and other dollar-denominated commodities. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now