The US Dollar (USD) is slightly firmer but not at its peak as it approaches the Federal Reserve’s decision, with the DXY index capped around 99. The Australian Dollar is performing well after stronger than anticipated Q3 CPI data, reducing expectations of imminent RBA rate cuts. Conversely, the British Pound is struggling due to soft sentiment before the November budget. Global stocks remain mixed while bonds are marginally softer, and gold has recovered above $4000. LME copper reached a record high, partially due to hopes for US-China trade progress.

The market is facing various factors but may stabilise ahead of the Federal Reserve’s decisions. It’s anticipated the Federal Open Market Committee (FOMC) will announce a 25 basis points cut, reducing the Fed Funds target rate to 4.00%. This dovish move may signal an end to the Fed’s quantitative tightening phase. Additional cuts are expected, with markets predicting the rate will drop to 3.00% by late 2026. This raises questions about whether these changes will reduce the USD in the coming months. A mixed level of dissenting opinion from Fed governors leaves room for faster easing next year. Chair Powell’s cautious policy approach may impact the USD if dovish guidance is provided.

Market Focus on Federal Reserve Policy

As of today, October 29, 2025, the market is primarily focused on the Federal Reserve’s policy decision. The expected 25 basis point rate cut to 4.00% is fully priced in, with futures markets showing nearly 100% probability for this outcome. The most significant market driver will not be the cut itself, but the forward guidance offered in the Fed’s statement.

The US Dollar Index is currently struggling to break above the 99 level, which is a notable shift from the highs over 105 we experienced back in 2023. This reflects the market’s adjustment to a new phase of monetary easing after years of tightening policy. A clearly dovish tone from the central bank today could be the catalyst that pushes the dollar decisively lower.

With so much uncertainty surrounding the Fed’s future path, we expect a short-term spike in currency volatility. The VIX index has been holding around 17, suggesting traders are braced for a potential move following the announcement. This environment is ideal for options strategies like straddles on major currency pairs, which can profit from a significant price swing regardless of the direction.

For traders who believe the Fed will signal a faster pace of cuts, positioning for a weaker dollar in the coming weeks is a viable strategy. We have seen core inflation cool to 2.8% this past quarter, a significant drop from the 3.7% levels recorded in late 2023, giving the Fed justification to adopt a more dovish stance. This could involve buying puts on dollar-tracking ETFs or purchasing calls on currencies with stronger fundamentals, such as the Australian dollar.

Long Term View on Dollar Trend

It is also important that we consider the longer-term view, as markets are already pricing in rates dropping to 3.00% by the end of 2026. This established trend suggests the dollar’s path of least resistance is downward over the next year. Derivative traders may want to look at longer-dated options expiring in early 2026 to position for this gradual decline.

Create your live VT Markets account and start trading now.