The US dollar remained supported by energy-shock risk aversion, after this week’s gains and as the overshoot in crude oil prices stalled. Bond and equity declines stabilised, while attention turned to geopolitics, including the timing around the 3 November midterms.
Markets were focused on the FOMC decision scheduled for 7:00pm London and 2:00pm New York, with policy expected to shift following five straight holds. The committee was poised to deliver a 25bps hike to a 3.75%–4.00% target range, its first increase since July 2023, as persistently above-target US inflation and a stable labour market supported tighter policy. Fed funds futures implied 94% odds of a hike, and pricing in the swaps curve pointed to almost 100bps of tightening over the next 12 months, comprising 25bps on the day and a further 25bps by year-end, alongside nearly 50bps by September 2027. The market focus extended to the vote split, the Summary of Economic Projections, and the Fed Chair’s press conference, while the nominal neutral rate was placed at around 3.00%.
USD Support Driven by Energy Markets and Geopolitical Risks
We see the US Dollar holding onto its recent gains, heavily supported by energy-driven risk aversion as global crude benchmarks remain highly volatile. With the crucial November 3, 2026, US midterm elections fast approaching, political incentives to keep energy markets tight are expected to persist. Derivative traders should leverage this environment by focusing on implied volatility plays in energy-sensitive currency pairs.
FOMC Expectations, Volatility Plays, and USD Downside Risk
Today’s FOMC decision is highly anticipated, with fed funds futures pricing in a 94% chance of a 25-basis-point hike to a target range of 3.75%-4.00%. Because this move is almost entirely priced in, the real market driver will be the updated Summary of Economic Projections and the post-meeting press conference. We suggest trading the post-announcement reaction using short-term straddles to capture unexpected swings in the major currency pairs.
The swaps curve currently factors in nearly 100 basis points of tightening over the next twelve months, creating a highly asymmetric risk profile for the greenback. This aggressive pricing leaves very little room for the Dollar to rally further on hawkish news, but leaves it highly vulnerable to a sharp drop on any dovish surprise. We recommend buying USD put options to profit from a potential downward correction in the currency over the coming weeks.
Our analysis shows that underlying US economic conditions, including a notable cooling in wage growth to a 3.4% annual rate, do not justify an aggressive tightening path. With the Fed’s policy rate already restrictive compared to a neutral rate of 3.00%, the central bank is likely closer to its peak than the market currently estimates. Traders should look to establish short-USD positions in the options market as economic reality eventually forces a market repricing.
