Markets are almost certain that the Federal Reserve will lower the key interest rate by 25 basis points at its upcoming meeting on Wednesday, but when it comes to the Fed's agenda for interest rates, the future is unclear. Just a week ago, three rate cuts were expected in 2026. As of Monday morning, futures are pricing in only two rate cuts in April and September. It seems that Fed Chair Jerome Powell has yielded to pressure for a December rate cut, but will oppose further monetary easing until the end of his term.

One thing is certain—inflation expectations are decreasing, and even the hawks in the FOMC must take this into account. Consequently, further rate cuts will face less resistance, putting significant pressure on the dollar.

It appears that the US dollar may recover some losses after the Fed meeting results are announced, as the future rate trajectory remains unclear. Besides, the missing inflation data that will be released next week, providing a clearer overall picture. Special attention will also be directed toward the updated forecasts that the Federal Reserve will have to provide without complete data on inflation and the labor market for October and November.

Uncertainty for the dollar is not diminishing; in fact, it is growing. In our previous review, we noted that there is a scenario where a Fed rate cut does not lead to a decrease in bond yields. The yield on 10-year US Treasuries has been rising since the end of November, as the market reaches a consensus regarding its confidence in a rate cut on December 10. This dynamic says a lot, particularly about Trump's plan to swiftly cut interest rates while increasing import tariffs, creating conditions for the revival of US industry and lowering lending rates, which is not gaining traction in financial markets. If bond yields do not decrease, the US will struggle to find a solution regarding the rapid growth of national debt and its servicing costs. This undermines trust in the dollar and puts pressure on it, even amid high yield levels.

The overnight rate remained high throughout November and surged significantly above the Fed's interest rate by the end of the month. Banks are also actively utilizing the permanent repo mechanism amounting to $26 billion, highlighting liquidity issues. If markets conclude that liquidity problems are a consequence of the end of quantitative tightening, the next conclusion will be that additional capital infusions into the overnight market are needed, either through opening new credit lines or through asset purchases and subsequent liquidity injections. Regardless of the perspective, this indicates expectations of looming quantitative easing, and these expectations do not add stability to the dollar.

Another risk presents signs of being institutional, meaning it disrupts the balance of economic interests. This involves Trump's desire to take control of the Fed. Key factors include the Supreme Court's decision on Lisa Cook's case, the likelihood of Powell leaving his post before the end of his term in May, and the requirement for FOMC members to reside in their districts for at least three years. All of this could lead to the reelection of several FOMC members, and if the market perceives that the trend is moving toward increased Trump control over the Fed, that would further undermine trust in the dollar.

Thus, the dollar is finishing the year under challenging conditions. There are currently no serious reasons to expect its growth. Let me warn you of low volatility in the next two days, as investors may prefer not to take risks ahead of the FOMC meeting announcements. Overall, investors are factoring in the fact that the dollar remains under significant pressure. Only something extraordinary could change the bearish outloook for the greenback.