Insights 
VT 
In September 2024, the Federal Reserve reduced interest rates by 50 basis points to address a potential labour market slowdown and disinflation concerns, projecting two more cuts by year-end and two more the following year. Despite this, the market anticipated three rate cuts by the end of the year and four more the next year. Subsequently, stronger-than-expected US data and a robust NFP report in October led to hawkish market adjustments, resulting in a US dollar rally and increased Treasury yields.
By September 2025, the Fed again cut rates by 25 basis points due to a slowing labour market, while inflation showed an upward trend, predicting two additional cuts by year-end and one more the next year. However, the market priced in nearly three cuts the following year. Following the Fed’s decision, better-than-expected US jobless claims led to a rise in Treasury yields and the US dollar. Upcoming US economic data, including PMIs, Jobless Claims, and the NFP report, will be pivotal. Strong data could prompt a hawkish shift in interest rate expectations, boosting the US dollar and Treasury yields, whereas weak data might affirm the market’s stance, applying downward pressure on the dollar and yields.
The Market’s Aggressive Projections
It seems we have seen this situation before, with a clear split between our own projections and the market’s aggressive pricing for rate cuts. Following the Federal Reserve’s 25 basis point cut this week, the market is already betting on nearly three full cuts for 2026. This is happening despite recent Core PCE inflation for August 2025 remaining stubbornly above 3%, complicating the path forward.
We only have to look back to September of 2024 to see how this can play out. The market priced in far more cuts than the Fed projected, only to be proven wrong by strong economic data. We remember how the October 2024 Non-Farm Payrolls report came in surprisingly strong at over 240,000, causing a sharp rally in the dollar and a spike in Treasury yields as dovish bets were unwound.
The pattern may already be repeating itself this time around. Just yesterday, weekly jobless claims came in at 205,000, well below the 220,000 that was expected, suggesting underlying strength in the labor market. This initial data point directly challenges the market’s dovish narrative and supports the idea that the economy is more resilient than priced in.
Potential Strategies for Traders
Given this setup, traders should consider positions that would benefit from a hawkish repricing in the coming weeks. This could involve buying call options on the U.S. Dollar Index or purchasing put options on Treasury futures, anticipating that yields will rise. The key catalysts to watch will be the upcoming ISM PMI data and, most importantly, the September jobs report scheduled for October 3rd.
If that upcoming data confirms a resilient economy, the market will likely be forced to reverse its aggressive rate cut expectations, just as it did last year. This would create significant upside for the dollar against other major currencies and push bond yields higher. The risk is that the data suddenly weakens, which would validate the market’s view and continue to weigh on the dollar.
