Any room for surprise from the Fed?

Tomorrow marks the penultimate FOMC meeting of the year, and according to the CME FedWatch Tool, there’s a 97.8% chance the Fed will cut rates by another 25 basis points, bringing the target range to 3.75–4.00%. Since this move is already largely priced in, its direct impact on the S&P 500 and Nasdaq is expected to be limited.

The real intrigue comes after Jerome Powell's speech.

If his speech suggests that the Fed is willing to continue cutting rates, given that inflationary pressures from trade wars have been more moderate than expected, risk assets could experience another bullish round. This would likely affect not only stocks but also cryptocurrencies, particularly the rates of BTCUSD and ETHUSD.

Markets will also be watching closely for any hints about the Fed’s quantitative tightening — the ongoing withdrawal of liquidity. There’s reason to expect some dovish signals here, as recent strains in U.S. money markets have prompted the Fed to step up its use of overnight repurchase agreements.

Although a full return to quantitative easing is not expected, any indication that the Fed might ease liquidity could boost risk assets. Add to this the possibility of a trade agreement between the U.S. and China later on, and overall risk confidence could be further bolstered, potentially fueling the uptrend even more.

And, for now, investors seem to be positioning themselves precisely for this scenario. But it is far from guaranteed. Powell has previously warned that the risk of stagflation in the U.S. remains, and if that risk materializes, traditional safe-haven assets, particularly gold, could benefit once again.

The U.S. dollar could also strengthen.

However, in the baseline scenario, most expect a gradual decline in the dollar index through 2026, as the Fed is likely to cut interest rates more aggressively than other central banks. A weaker dollar would favor U.S. exporters and would be in line with Donald Trump's long-held view that the dollar is overvalued.

Finally, regarding this week's meetings of the Japanese and European central banks, both are expected to keep their monetary policies unchanged, so any direct impact on the markets should be limited. In Japan, attention is focused more on the stimulus package proposed by the country's new prime minister, Sanae Takaichi.