Traders are only barely seeing one rate cut by the Fed for this year now | Forexlive

Prior to the strong US jobs report at the end of last week, traders had priced in the first rate cut for June this year. In total, market players were looking for ~42 bps going into Friday at the time. Fast forward to today and the landscape has shifted quite dramatically.

As things stand, Fed funds futures are showing just ~26 bps of rate cuts in total for the year. And that is only fully priced in by December (one can argue for September or October as it shows ~88% or ~96% odds respectively by then). But we’re only in January, so I wouldn’t be too hard pressed to attach much confidence in the exact pricing for that.

However, what stands out is that traders are now no longer confident that the Fed will cut rates in the first half of the year. And that is the key takeaway after the labour market data last week. So, what’s next?

I would argue that what the Friday data did was that it served to reaffirm the Fed communique from December. And that means pausing on rate cuts for the time being. But this is perhaps the limit as to where we’re at in terms of identifying stronger data in holding back the Fed.

The other key risk factor in play is Trump’s policies, in particular that on trade. The fear now is that with strong US data, a war on tariffs will risk stoking the inflation flames in the year(s) ahead.

Given the market pricing, I would say traders are already taking into consideration a hefty chunk of said risk. So, it’ll be over to Trump to follow through on that.

And as mentioned, we might be close to reaching a limit on that. But it is best to remember that the US economy is still the cleanest shirt among the dirty laundry. And that also counts for something that could keep fueling the dollar rally to start the year.

The tail risk to that will be Trump tariffs not living up to the hype. And we got an early taste of that last week, where the pullback can be rather sharp and squeezy. It came after this report here, which was swiftly denied by Trump after.