The U.S. Federal Reserve is anticipated to deliver a rate cut, but HSBC suggests the dollar might experience a brief rise following the decision. Traders have already priced in about 140 basis points of easing through the end of 2026, creating high expectations for further actions from the Fed.
HSBC believes that unless policymakers indicate a quicker pace of rate cuts, there is a chance for a short-lived increase in the dollar’s value right after the announcement. However, this potential increase is expected to be temporary, with ongoing concerns about weak U.S. labour data supporting the possibility of further rate cuts.
The FOMC Meeting
The Federal Open Market Committee (FOMC) is set to meet on the 16th and 17th of September. Previous meetings have included discussions about the constraints on market rate-cut expectations and the Federal Reserve chair’s role in maintaining independence, dollar stability, and low inflation.
With the FOMC meeting starting tomorrow, we see that a rate cut is almost entirely priced into the market. Fed funds futures indicate a 98% chance of a 25-basis-point reduction this week. This high level of certainty means the initial market reaction could be deceptive for those unprepared.
We believe this creates an opportunity for a short-term dollar rally if the Fed’s statement is not as aggressively dovish as some hope. Traders could consider buying short-dated call options on the U.S. Dollar Index (DXY) to capture a potential brief squeeze higher. This strategy would capitalize on any disappointment from those expecting promises of rapid, deep cuts.
The Strategy Ahead
However, we expect any dollar strength to be fleeting, as the underlying economic data points to further weakness. The recent August jobs report, which showed payrolls at just 135,000 against a 170,000 forecast and an unemployment rate rising to 4.1%, supports the case for more easing. This softening labor market gives the Fed a clear reason to continue cutting rates in the months ahead.
The Fed has room to act, especially since last week’s CPI data showed core inflation fell to a two-year low of 2.8%. This reminds us of the cutting cycle that began in mid-2019, where initial “mid-cycle adjustments” led to a series of cuts as the economy cooled. We anticipate a similar pattern could unfold through 2026.
Therefore, the more strategic play may be to use any post-meeting dollar strength as an opportunity to initiate bearish positions for the coming weeks. This could involve selling call options against the rally or buying longer-dated put options on the dollar. The fundamental pressure from a slowing economy and a confirmed easing cycle will likely outweigh any hawkish surprise this week.
