ABN AMRO economists expect the Federal Reserve to begin cutting rates in September, then ease gradually over the next two years as the federal funds rate moves towards its longer-run neutral level. The report concentrates on macro drivers for the US Dollar rather than short-term market fluctuations, linking the currency outlook to the Fed’s policy path, balance sheet strategy, and the direction of US growth and inflation relative to other advanced economies.
In the bank’s baseline scenario, moderating US growth and easing inflation pressures, alongside gradual Fed easing, point to a modest Dollar depreciation over the next 12 to 18 months, with “exceptionalism” fading if growth converges with peers. However, if inflation is stickier and rate cuts are delayed or smaller, the Dollar could stay stronger for longer against the Euro and other majors. Risks are described as two-sided: a sharper-than-expected US slowdown or a renewed inflation flare-up could shift Fed policy in divergent directions and alter the Dollar’s trajectory.
US Economic Moderation and Dollar Outlook
We see the Federal Reserve signaling a potential pivot, with a first rate cut likely coming in September. Recent data supports this, as May’s inflation held at 2.8%, still above target but cooling, while first-quarter GDP growth was a modest 1.5%. This suggests the US economy is finally moderating after the post-pandemic strength.
Given this outlook, we are positioning for a modest depreciation of the US dollar over the next several months. For derivatives traders, this means exploring strategies like buying puts on the Dollar Index (DXY) or purchasing call options on currency pairs like EUR/USD, targeting expiries late in the fourth quarter. The European Central Bank’s own rate cuts, which began back in June 2024, are now largely priced in, allowing the Fed’s next move to be the dominant driver.
Strategy Adjustments Amid Two-Sided Risks
However, the risk of stickier-than-expected inflation remains a primary concern, which could delay any rate cuts and strengthen the dollar. To hedge this, we are considering short-dated call options on the dollar, which would profit from a hawkish surprise at the July or September Fed meetings. A strategy like a bull call spread on USD/JPY could offer a low-cost way to position for continued dollar strength if inflation data reverses its downward trend.
There is also an outside chance of a sharper economic slowdown than is currently anticipated. If the recent non-farm payrolls figure, which came in at a softer 150,000, is the start of a weaker trend, the Fed could be forced to cut rates more aggressively. This scenario would accelerate the dollar’s decline, making longer-dated, out-of-the-money puts on the dollar an attractive, albeit risky, proposition.
With these two-sided risks, implied volatility on major currency pairs will likely rise ahead of key data releases. We believe options that benefit from price movement in either direction, such as long straddles on USD/CHF around Fed meeting dates, could be effective. This allows us to capitalize on the market’s uncertainty without betting on a single outcome for the dollar.
