Fed's December Rate Cut Hopes Fade as Hawkish Signals Strengthen Dollar Rally

Market Momentum Shifts as Rate Cut Prospects Dim

The dollar surged to a 2-week high on Wednesday, with the DXY posting a +0.65% gain amid shifting expectations around the Fed’s monetary policy path. The primary catalyst was the U.S. Bureau of Labor Statistics canceling the October employment report, a move that significantly reduced the likelihood of a December rate cut to just 28%—a dramatic reversal from 70% probability the previous week.

Fed Minutes Point to Steady Rates Through Year-End

Hawkish commentary from the October 28-29 FOMC meeting minutes further reinforced the dollar’s strength. A significant portion of Fed officials signaled they favor maintaining interest rates steady for the remainder of 2025, effectively cooling market enthusiasm for the anticipated December 9-10 rate cut. This shift in Fed communication has reshaped trader positioning and shifted safe-haven flows.

Trade Data Supports Dollar Strength

Supporting the dollar’s rally was better-than-expected U.S. trade news. August’s trade deficit narrowed to -$59.6 billion from -$78.2 billion in July, beating economist forecasts of -$60.4 billion. Additionally, US MBA mortgage applications contracted by -5.2% in the week ending November 14, with the average 30-year fixed mortgage rate rising 3 basis points to 6.37%.

Yen Weakness Amplifies Dollar Gains

The dollar also benefited from yen selling pressure. The USD/JPY pair advanced +0.95% as the yen touched a 10-month low, driven by dovish remarks from Goushi Kataoka, an advisor to Japanese PM Takaichi. Kataoka suggested the BOJ is unlikely to hike rates before March, while also announcing a proposed supplementary budget of approximately 20 trillion yen to stimulate domestic demand—nearly 50% larger than the previous year’s 13.9 trillion yen package. Market pricing now reflects only a 10% probability of a BOJ rate hike at the December 19 meeting.

Euro Under Pressure as Central Bank Divergence Persists

The EUR/USD pair declined -0.46% to a 1.5-week low as the stronger dollar weighed on the common currency. However, euro losses remained contained as reports suggested the Trump administration was coordinating with Russia on Ukraine peace negotiations. The ECB’s completed rate-cut cycle versus the Fed’s anticipated additional cuts continue to support medium-term euro fundamentals, with swaps pricing a mere 4% chance of a -25 bp ECB cut on December 18.

Precious Metals Navigate Mixed Signals

December COMEX gold closed up +16.30 points (+0.40%), while December COMEX silver gained +0.333 (+0.66%), recovering from the previous week’s sharp declines. The dovish BOJ commentary initially supported gold as a store of value; however, precious metals retreated from intraday highs as the dollar index rebounded and December rate cut fade became more pronounced.

Central bank buying provided underlying support, with China’s PBOC reserves rising to 74.09 million troy ounces in October—marking the twelfth consecutive month of reserve accumulation. The World Gold Council reported global central banks purchased 220 MT of gold in Q3, up 28% from Q2. However, long liquidation pressures and reduced expectations for Federal Reserve cuts have capped the upside, particularly after gold holdings in ETFs declined following October 21 record highs.

Broader Market Implications

The convergence of stronger economic data, hawkish Fed guidance, and the canceled employment report has fundamentally altered near-term rate cut expectations. With December now appearing increasingly unlikely for a cut, attention will likely shift toward 2026 policy. Geopolitical uncertainty regarding tariffs and Ukraine continue to provide underlying safe-haven demand for precious metals and the U.S. dollar alike.