Traders drastically cut expectations! The Federal Reserve's December rate hike or cut probability has changed dramatically, with the dollar hitting its strongest rally since September

Expectations of a Sharp Reversal, Market Confidence in the Federal Reserve’s Rate Cuts Disintegrates

According to the latest data from CME’s “FedWatch” tool, traders’ expectations for a rate cut in December have experienced a startling reversal. The probability of a rate cut on Tuesday still hovered around 50%, but as data gaps caused by the federal government shutdown became apparent, this expectation quickly collapsed within a day—currently, the probability has fallen to about 30%. Even more astonishing, about a month ago, the market’s expectation for a rate cut that month was as high as 94%, dropping from 94% to 30%, illustrating a significant shift in market sentiment.

This adjustment in expectations has directly driven the dollar’s strength. During Wednesday’s (November 19) New York session, the dollar index posted its best single-day performance since September 25, with the Bloomberg dollar spot index rising 0.5%, hitting a two-week high at the close. Driven by the dollar’s rally, other major currencies also came under pressure. The GBP/USD was the weakest, falling 0.7% on Wednesday, marking its fourth consecutive day of decline—the longest streak since October 24. The yen also plunged 1.1% to 157.18, reaching its weakest level since mid-January. The New Zealand dollar also fell to its lowest since April, erasing its gains for the year.

Data Vacuum Period Sparks Policy Uncertainty

The root of the issue lies in an announcement from the U.S. Bureau of Labor Statistics on Wednesday. Due to the federal government shutdown (the longest in U.S. history), the agency was unable to release October employment data on time, including the unemployment rate. The BLS decided to incorporate October data into the November full report, but this creates a serious policy issue: the November non-farm payroll report, originally scheduled for release on December 5, has been postponed to December 16.

The impact of this timing gap should not be underestimated. The Fed’s last policy meeting of the year will be held in early December, but the new employment data will only be available six days after the meeting concludes. This means that Fed policymakers will have very limited economic data when considering whether to raise or cut rates in December. The September non-farm report will be released this Thursday, but without the complete October data, its reference value is significantly diminished.

Clash Between Market and Officials’ Stances

U.S. bank strategist Alex Cohen commented on Wednesday that the dollar’s rebound “looks quite impressive” today, and believes there is still room for further appreciation, as traders need more evidence to justify a rate cut in December. In other words, with insufficient data, rate cuts become a high-risk decision.

This cautious attitude echoes internal divisions within the Fed. Minutes from the October 28-29 meeting released Wednesday show that, despite the decision to cut rates last month, there are significant disagreements among policymakers. Participants generally worry that continuing to lower borrowing costs could undermine inflation-fighting efforts. Aroop Chatterjee, a strategist at Wells Fargo in New York, bluntly stated that, given the lack of timely data, the likelihood of holding rates steady has increased significantly. Unless the September employment data shows unusually weak figures, most decision-makers will likely keep rates unchanged in December.

Chain Reaction: Gold and Other Assets Experience Volatile Swings

The market’s sudden shift in rate cut expectations has also caused turbulence in other markets. Gold prices fluctuated sharply during Wednesday’s session, soaring to a daily high of 4132.86 USD/oz early in the session, then plunging rapidly to a low of 4055.53 USD/oz. Ultimately, spot gold closed Wednesday up only 0.26% at 4077.93 USD/oz, erasing its intraday gains.

This plunge in gold is directly linked to the strong dollar—an appreciating dollar makes gold priced in USD more expensive for overseas buyers, reducing its purchasing power. Meanwhile, the decline in rate cut expectations also diminishes gold’s appeal as a safe-haven asset, as gold’s yield cannot compete with higher U.S. Treasury yields.

Concerns over the UK fiscal outlook further fueled the decline, putting additional pressure on the pound and dragging down risk assets like the euro. All these developments point in the same direction: as expectations for rate hikes or cuts shift, traders are reassessing global asset allocations.