12.01.202609:43 Forex Analysis & Reviews: Chances of imminent Fed rate cut remain slim

Traders have almost abandoned forecasts that the Federal Reserve will cut interest rates at the end of this month after the US unemployment rate fell by more than expected in December.

As a result, there was a sell?off in short?term Treasury securities: the two?year yield rose by nearly five basis points, reaching its highest level this year. Bond traders have maintained expectations for two rate cuts in 2026, with the first now seen only toward midyear.

The federal funds futures market now shows the probability of a rate cut at the end of January at under 5%. A week ago, before the release of the employment data, that probability was estimated at roughly 30%. This sharp shift in sentiment reflects investor confidence that the Fed will not rush to lower rates until it sees more convincing evidence of slowing economic growth.

Expectations about the Fed's future actions have also changed. Traders now forecast that the first cut will not occur before March and that the total number of rate reductions over the year will be smaller than previously expected.

This could prompt a re-pricing of assets and impact investment decisions across various sectors of the economy.

At the same time, it is important to acknowledge that financial markets remain dynamic and that new data could quickly alter sentiment.

Morgan Stanley, Barclays, and Citigroup have pushed back their forecasts for Fed rate cuts to a later period—roughly the start of summer this year. Those firms still predict a total of 50 basis points of rate cuts for the year, despite weaker?than?expected payroll gains.

It is worth noting that Friday's labor?market data were the first to allow an objective assessment of overall employment dynamics after a six?week partial shutdown of the U.S. government from October 1 to November 12, 2025, which delayed publication of labor reports for September, October, and November.

Arguments in favor of further Fed rate cuts, it is thought, will depend on how the labor?market situation develops in the coming months.

Although the central bank cut its target range at its last three meetings in response to weakening labor?market conditions, some officials remain concerned that inflation may persist above the target. That concern is believed to limit the pace of further monetary easing.

Meanwhile, traders remain unclear about the legality of tariffs imposed by President Donald Trump, following the Supreme Court's Friday delay of a ruling.

Notably, on November 5, the court, according to the arguments presented, expressed doubt that Mr. Trump had the authority to impose tariffs under the 1977 statute that grants the president special emergency powers. The case is now before the Supreme Court, the court of last resort. A decision to overturn the tariffs would revive budgetary concerns, creating the risk of higher long?term yields and steeper yield curves.

Nevertheless, experts note that any market impact is likely to be fairly limited given the administration's ability to pursue alternative routes to restore many of the levies.

Regarding the current technical picture for EUR/USD, buyers should now consider reclaiming the 1.1680 level. Only that would allow them to target a test of 1.1705. From there, a climb to 1.1725 is possible, although achieving that without support from major players would be rather difficult. The farthest target will be the high at 1.1740. In the event of a decline, I expect significant buying interest only around 1.1640. If there is no one there, it would be advisable to wait for an update of the low at 1.1619 or to open long positions from 1.1591.

As for GBP/USD, its buyers need to capture the nearest resistance at 1.3435. That would allow a move toward 1.3460, above which a breakout would be challenging. The extended target is the area around 1.3488. Should the pair fall, bears will attempt to seize control at 1.3403. If they succeed, a break of that range would deal a serious blow to bullish positions and could push GBP/USD down to 1.3373, with scope to extend to 1.3341.