Brown Brothers Harriman expects the Federal Open Market Committee to leave the federal funds target range unchanged at 3.50%–3.75%, which would mark a fifth consecutive meeting without a move. The decision is due at 7:00pm London time (2:00pm New York), followed by a press conference from Fed Chair Kevin Warsh 30 minutes later.
Fed funds futures imply over a 30% probability of a 25 basis point rise. In the event of no change, the US Dollar could see an initial pullback as rate-hike pricing is unwound, before recovering if accompanied by a hawkish policy message that reinforces expectations of tighter policy settings.
Trading Opportunities Amid Short-Term Dollar Volatility
We advise derivative traders to prepare for short-term volatility in the US Dollar ahead of today’s crucial FOMC decision. While the market currently prices in a 30% chance of a 25-basis-point rate hike, we expect the Fed to keep the benchmark rate steady at 3.50%-3.75%. If this rate hold occurs, any knee-jerk drop in the dollar should be viewed as a prime buying opportunity for the coming weeks.
This strategy is supported by recent macroeconomic data, with US core PCE inflation holding stubborn at 2.6% and consumer spending showing unexpected resilience. Historically, when the Fed pauses under sticky inflation conditions—similar to the brief pauses in 2023—the Dollar Index initially fell briefly before surging back by over 3% in the subsequent month. We suggest positioning for a similar quick recovery as hawkish policy guidance from the post-meeting press conference sinks in.
Recommended Strategies in FX and Interest Rate Markets
To capitalize on this expected path, we recommend using short-dated FX options to exploit the temporary dip. Specifically, buying EUR/USD put options on any post-announcement spike will capture the subsequent dollar rebound. This trade structure limits downside risk if the Fed surprises with a hike while maximizing gains once the hawkish tone drives the dollar back up.
Furthermore, we see excellent value in shorting Fed funds futures for the autumn contracts if they rally on today’s pause. Treasury yields, particularly the 2-year note which has been hovering near 4.10%, are highly likely to rise as the market reprices the “higher-for-longer” narrative. Hedging against a prolonged hold at 3.50%-3.75% will protect portfolios against sticky yields through the rest of August.
