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Expectations for the Federal Reserve to cut interest rates rise, but disagreements remain: Why is the dollar “stable but not chaotic”?
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Hello everyone, today XM Forex will bring you "[XM Forex Platform]: Expectations of the Federal Reserve to cut interest rates are rising but differences remain: Why is the US dollar "stable but not chaotic"?". Hope this helps you! The original content is as follows:
Back in mid-November, market expectations for the Federal Reserve to cut interest rates in December were in the doldrums. Affected by factors such as the delayed release of economic data caused by the previous U.S. government shutdown and the September employment report that added more jobs than expected (even though the unemployment rate rose to 4.4%), market sentiment cooled down for a time.
As the authoritative interest rate futures pricing indicator on Wall Street, the monitoring data of the CMEFedWatch tool clearly shows the expected dynamic changes: on November 13, the probability of a 25 basis point interest rate cut in December fell to 49.4%, close to the "50-50" threshold; on November 20, although this probability fluctuated slightly to 44.4%, it still reflected the market's disagreement on the policy direction. However, as core officials of the Federal Reserve released intensive dovish signals, expectations quickly changed - as of November 25, the probability of a 25 basis point interest rate cut in December has soared to 80.7%, a significant increase from 69.4% the previous day. "High probability of interest rate cut" has become the mainstream judgment of the current market.
Statements by institutions and officials further support this shift, while also revealing the roots of disagreements. In his speech on November 24, Federal Reserve Governor Christopher Waller clearly sent a dovish signal, saying that "most private sector data showed a weak job market and advocated a rate cut in December." However, he also emphasized that actions after January are "more uncertain" because lagging economic data (such as the Beige Book) during the government shutdown may reshape judgments on employment and inflation. San Francisco Fed President Daley also publicly expressed support for a December interest rate cut on the grounds that "a sudden deterioration in the job market is more likely than a sudden rise in inflation, and it is more difficult to control."
This kind of "mainstream support for interest rate cuts"But the attitude of "remaining cautious" has formed a consensus within the Federal Reserve: New York Fed President John Williams emphasized in late November that there is still "room for further adjustment" in the policy, and a balance needs to be found between the annualized inflation level of 3% in September and employment risks; and in the minutes of the October meeting, "many participants tended to maintain interest rates unchanged, and a few supported an interest rate cut in December". The split pattern has been followed by the latest data According to the release, it has eased - Goldman Sachs and other leading institutions have clearly predicted that the Federal Reserve will launch a third consecutive interest rate cut in December, and it is expected to cut again in March and June 2026, and finally reduce the federal funds rate to a range of 3.00%-3.25%. However, differences still exist. JPMorgan Chase previously predicted that the interest rate cut may be postponed to January. Economists surveyed by FactSet earlier. The probability of recognition is only 22%. Although these views are no longer mainstream, they reflect the market's caution about the sustainability of the policy.
The "double tug-of-war" between inflation and employment is still the core of the disagreement. The data of 119,000 new jobs in September may be revised downward, and the signal of cooling in the labor market is gradually emerging. In terms of inflation, Waller clearly pointed out that the impact of tariffs on inflation is "one-time and has no impact." "Big", the inflation rate after excluding tariffs is about 2.4% or 2.5%, which is not the "stubbornly high" that was previously worried. This xmmarkets.cnbination of "weak employment and controllable inflation" makes the logic of the Federal Reserve's interest rate cut in December clearer, but the uncertainty of lagging data still makes the market afraid to fully bet, which is also the key to the expectation that it is not "ironclad".
The US dollar is "stable but not chaotic": Expected balance restrains extreme fluctuations
Although interest rate cut expectations have risen rapidly from the downturn, the US dollar index has not fluctuated violently, but has shown the characteristics of "high and stable" - since October, the main link price of the US dollar index has stabilized in the 99-100.3 range. The closing price on November 24 was 100.135, and it climbed from 99.49 to 100 on November 19. .055, the whole process has not touched the lower limit range of 96-99 mentioned in the original article; the trade-weighted index has been basically flat for three months, and the foreign exchange implied volatility (FX version of VIX) continues to be low, well below the 2024 high.
Institutional analysis pointed out that this steady state stems from the suppression of unilateral bets by the "expected balance" of the U.S. Treasury Borrowing Advisory xmmarkets.cnmittee (TB). AC) mentioned in a report on November 4 that the low market volatility is related to "the lack of key data due to the government shutdown and the stronger than expected economic resilience of the United States and the world" - investors can neither short the US dollar due to the "100% interest rate cut" signal, nor will they go crazy and go long due to concerns about the "failure of the interest rate cut".
The interpretation of different institutions has further enriched the trading behavior. Rich in this logic: Cambridge Currencies emphasized in its outlook on November 16 that the U.S. dollar is currently in a "neutral to strong" state. "Although the Fed's interest rate advantage has weakened, factors such as the return of capital and the easing of trade uncertainty under the uneven global economic recovery have formed a hedge and suppressed volatility; Macquarie Group Chief EconomistEconomist Larry Weitzman pointed out that the U.S. dollar has not appreciated significantly due to external uncertainties recently and only plays a small role as a safe haven when inflation data is released. Unless the stock market plummets and forces the Federal Reserve to release a more aggressive easing signal, the U.S. dollar will not experience a trend depreciation.
The xmmarkets.cnparison of global policy cycles also provides support for the stability of the US dollar. ING predicted in its November foreign exchange outlook that the U.S. dollar will depreciate moderately before 2026, but "low volatility" is the core feature - even if the Federal Reserve cuts interest rates in December, it is only expected to cut interest rates 1-2 times in 2026, while other major central banks such as the European Central Bank and the Bank of Japan may be more aggressive in easing. This "relatively hawkish" policy difference neutralizes the suppressive effect of interest rate cuts on the U.S. dollar.
The influence of political factors tends to weaken. "The pressure of the Trump administration's tariff policy on the Federal Reserve" is no longer the focus of the current market - Waller and other officials have clearly downplayed the long-term impact of tariffs on inflation. The market is more focused on the matching of the Federal Reserve's policy and economic data rather than external political intervention. This cognitive consensus has avoided panic trading in the US dollar due to concerns about policy independence. Morgan Stanley concluded in its November report that although the Fed's interest rate cut cycle supports capital inflows into emerging markets, the "weakness" of the U.S. dollar is neutralized by differences in global growth resilience and policy cycles, ultimately forming a "stable but not chaotic" pattern.
In short, the current steady-state nature of the US dollar is the "equilibrium of the expected game": bulls see policy differences and relative interest rate advantages, while bears bet on the implementation of interest rate cuts and economic resilience, and the forces of both parties check and balance each other. As the December meeting approaches and lagging economic data is released, this balance may be disturbed, but for now, "consensus among differences" will still dominate the dollar's solid performance.
The above content is all about "[XM Foreign Exchange Platform]: The Federal Reserve's interest rate cut expectations are rising but differences remain: Why is the U.S. dollar "stable but not chaotic"?", which was carefully xmmarkets.cnpiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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