Insights 
VT 
In September, a 25 basis point rate cut by the Federal Reserve led to a rally in the US Dollar (USD) due to an unexpected short positioning and some perceived hawkish comments from Powell. However, current expectations and market positioning suggest a different outcome for a similar rate cut today.
Market setups today include a priced-in 25 basis point cut and expectations of another reduction in December. Yet, USD positioning now appears more balanced due to unavailable CFTC data from the shutdown but supported by options market data.
Current Economic Indicators
Recent US economic indicators, such as benign CPI data and signs of labour market deterioration, suggest Powell has no reason to adopt a more hawkish stance. While there are potential upside risks for the USD, any increase is expected to be less significant and shorter than the rally seen in September. Ending Quantitative Tightening (QT) could further limit the USD’s upward potential.
We’re looking at today’s Fed meeting, where a 25 basis point rate cut is widely expected, much like the one delivered back in September 2025. That September cut unexpectedly pushed the Dollar Index (DXY) up by 1.5% in two days as traders were caught off guard by hawkish commentary. However, conditions today suggest a much milder reaction is in store for the coming weeks.
A key difference from September is how traders are positioned. Back then, speculators were heavily short the dollar, and the rally was fueled by a classic short squeeze. Looking at options market data, like 3-month risk reversals which are now near zero, we see a much more balanced exposure this time around.
Chairman Powell has little incentive to sound hawkish, which would be needed to spark a major dollar rally. The latest CPI print for September 2025 came in at a benign 2.8% year-over-year, and recent weekly jobless claims have been trending above 230,000, signaling a softening labor market. Therefore, we should anticipate a commentary focused on managing the economic slowdown rather than fighting inflation.
Strategy for Derivative Traders
For derivative traders, this suggests caution against buying significant upside protection on the dollar. Any post-meeting rally is likely to be shallow and short-lived, presenting an opportunity to sell into strength rather than chase it. The potential announcement of an end to Quantitative Tightening (QT) further supports this view, as it would increase liquidity and act as a headwind for the dollar.
This pattern reminds us of the market action back in late 2022, when the dollar index peaked even as the Federal Reserve was still aggressively hiking rates. The market priced in the peak hawkishness well in advance, a dynamic that could be playing out in reverse now with rate cuts. Therefore, a strategy of selling DXY call options or establishing bearish risk reversals might be prudent for the weeks ahead.
