The USD Index is holding above 99.00 amid anticipation of the Federal Reserve meeting. The market expects a third consecutive 25-basis-points rate cut, timing attention on the Fed’s projections for future cuts.
The Dollar Index remains stable following a slight rejection at 99.30 but finds support above 99.00. Traders await the Federal Reserve’s monetary policy decision and focus on the “dot plot” that suggests future rate moves.
Modest Bearish Pressure
The index, measuring the USD against six currencies, faces modest bearish pressure due to adjustments in USD long positions. However, strong US Treasury yields support a week-long mild recovery.
Recent US data highlights an increase in job openings, with figures rising to 7.67 million in October. This, alongside firm inflation data, aligns with more conservative Fed views, challenging calls for easing.
The Federal Reserve’s role is central to monetary policy decisions, setting interest rates to manage inflation and employment. A decision to cut rates weakens the USD as it prompts capital outflow to higher-yielding investments elsewhere. The decision is due on December 10, 2025.
With the Federal Reserve widely expected to cut rates by 25 basis points to 3.75% today, the market has already priced in this move. Our focus, therefore, shifts entirely to the forward guidance from the dot plot and Chairman Powell’s press conference. The key is to see if the Fed validates the market’s expectation for two to three additional cuts in 2026.
Potentially Hawkish Tone from the Fed
Recent data supports a potentially hawkish tone from the Fed, even with a rate cut. We have seen the core PCE inflation index, the Fed’s preferred measure, remain stubbornly above 3.3% year-over-year in the latest November data, well over the 2% target. This, combined with the strong JOLTS job openings data from October, gives Chairman Powell reason to signal a pause on further easing.
We remember the “higher for longer” stance the Fed held through 2023, where they resisted market calls for early cuts until inflation was clearly defeated. This recent history suggests we should not underestimate their willingness to pause the easing cycle if the data does not fully cooperate. A hawkish surprise today could easily push the DXY back towards the 100.00 level.
Given the uncertainty around the dot plot, we see increased volatility in the US Dollar Index as the most likely outcome. Traders might consider strategies like straddles on USD-related currency pairs to play a significant move in either direction following the announcement. For those leaning towards a hawkish surprise, buying call options on the DXY or selling puts on the EUR/USD could be a viable approach.
