A poll conducted by Reuters reveals that 115 out of 117 economists predict the Federal Reserve will reduce interest rates by 25 basis points to a range of 3.75%-4.00% on 29 October. For the year, 83 economists anticipate two additional rate cuts, while 32 foresee only one more reduction.

There is concern among 25 of 33 economists that the end-of-cycle risk lies in setting rates too low. Despite rate cut speculations, the US Dollar Index, which measures the Greenback against six major currencies, has risen by 0.35%, reaching close to 98.95.

Monetary Policy Implications

The Federal Reserve shapes US monetary policy, aiming for price stability and full employment by adjusting interest rates. Higher rates bolster the US Dollar, attracting international capital, while lower rates aim to boost borrowing. The Fed holds eight policy meetings annually, with the Federal Open Market Committee guiding monetary decisions.

Quantitative Easing increases credit flow by buying bonds, potentially weakening the US Dollar. Conversely, Quantitative Tightening, which involves the Fed halting bond purchases, is generally favourable for the US Dollar’s value.

With an interest rate cut on October 29th almost guaranteed, the market has already priced this in. We see that the 25 basis point cut is so widely anticipated that the focus has shifted entirely to what the Federal Reserve will signal for its December meeting and into 2026. The actual rate cut event itself may therefore be a non-event for directional traders.

The US Dollar Index is strengthening despite the expected cut, which tells us the market is looking at relative economic strength. With the latest data showing the Eurozone flirting with recession after poor German factory orders, the US economy looks more resilient. We see the dollar is not being traded in a vacuum; it is being bought because other major economies may require even more aggressive easing from their own central banks.

Currency Market Dynamics

Our own economic data paints a conflicting picture that supports this uncertainty. While third-quarter GDP growth was a sluggish 1.5%, justifying the Fed’s action, the most recent September CPI report showed inflation remaining sticky at 3.4%. This tells us the Fed has little room to signal deep, aggressive cuts, which is supporting the dollar for now.

For derivative traders, this environment suggests focusing on volatility instead of a simple directional bet on the dollar. Since the big price move will likely follow the language in the Fed’s statement, not the cut itself, options strategies that profit from a large swing in either direction are worth considering. Buying a straddle on the EUR/USD over the announcement period could capture the market’s reaction to any surprises in the forward guidance.

We have seen this pattern in past cycles, such as in 2019, where the dollar strengthened even as the Fed cut rates because it was seen as the “least dovish” central bank. The biggest risk to the current dollar strength is if the Fed’s statement unexpectedly signals that more than the two consensus rate cuts are coming this year. This makes holding long-dated put options on the dollar a reasonable hedge against a sudden policy shift.

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