Fed Hawkish Cut with Dovish Undercurrents: Dollar Faces Pressure Amid Divergence

Daily Market Insights – December 11, 2025 | Ultima Markets

Global markets reacted to the Federal Reserve’s widely anticipated 25-basis-point rate cut, lowering the target range to 3.50%–3.75%. While the cut itself was fully priced in, attention quickly shifted to the Fed’s messaging and updated projections for 2026.

Fed Update: Hawkish Cut, But Dovish Undertones

The December decision reflects a classic “hawkish cut”—the Fed eased policy but signaled caution regarding the pace of future reductions. Key takeaways:

• Dot Plot Signals Fewer Cuts: The median projection now points to only one rate cut in 2026, below market expectations, reflecting ongoing inflation concerns. This removed overly aggressive easing bets and provided support to the U.S. Dollar.
• Vote Split: 9 officials supported the cut, 2 held steady, and 1 voted for a 50-bp reduction, highlighting some internal debate on the easing path.
• Market Interpretation: While easing is underway, the Fed remains cautious on inflation risks, tempering expectations for a rapid or extended rate-cut cycle.

Despite the hawkish dot plot, Chair Powell’s press conference and the December Summary of Economic Projections (SEP) conveyed a more dovish undertone.

Powell’s Statement: Flexible and Data-Dependent

Chair Powell emphasized that future rate adjustments are not on a preset path, with policy remaining data-dependent:

• No rate hikes are expected as the baseline scenario, supporting a dovish tilt.
• Signs of moderation in the labor market justify the current easing stance.
• The Fed remains open to further cuts if inflation or labor conditions warrant additional easing.

Inflation & Economic Outlook

The December SEP provides further context for policy decisions and suggests an underlying dovish bias:

• Core PCE Inflation: Forecast to ease to 2.5% in 2026
• Headline PCE Inflation: Projected at 2.4%

December Fed Dot Plot | Source: Federal Reserve

The dot plot also reveals a wide range of views: while the median indicates one cut, individual projections span from no cuts to four cuts in 2026, highlighting the Fed’s flexibility and emphasis on upcoming data. These projections support a cautiously positive approach to future rate adjustments, not an entirely hawkish cut.

Market Implication: US Dollar Faces Pressure

The Fed’s underlying dovish tone has tempered some of the earlier hawkish speculation, putting near-term pressure on the U.S. Dollar.

USDX, H4 Chart

The USDX has broken below a key support level, signaling that the Dollar may be entering a new bearish phase. The dovish undertones suggest continued downside risk, while any short-term rebounds could present potential “sell the rally” opportunities for traders.

Bank of Canada: Rate Hold Signals Near-End of Easing Cycle

The Bank of Canada (BoC) delivered its final policy decision of 2025 yesterday, meeting market expectations while signaling a likely pause in its easing cycle.

• Policy Decision: Governor Tiff Macklem stated that the current policy rate is “about the right level” to maintain inflation near the 2% target while supporting the economy during a period of structural adjustment.
• Forward Guidance: The BoC emphasized that if inflation and economic activity evolve broadly in line with its October projections, the current rate is appropriate, signaling limited scope for further cuts in the near term.

Market Reaction: The decision was interpreted as slightly hawkish, with some of the previously priced-in 2026 rate cuts now being scaled back. Ultima Markets analysts see this as the BoC likely being done with rate cuts for now, reinforcing a neutral-to-supportive outlook for the Canadian Dollar.

Implication for USD/CAD: The BoC’s pause and neutral stance provide upside support for the CAD, particularly against the U.S. Dollar, as markets begin to price in stability rather than further easing.

Daily Market Insights Takeaway

• USD: Near-term downside risk as dovish undertones temper earlier hawkish speculation. Short-term rallies may offer selling opportunities.
• USD/CAD: BoC pause reinforces CAD strength against the Dollar.
• Fed Outlook: Median of one cut in 2026, individual views range from no cuts to four, highlighting flexibility and data dependency.
• Market Theme: Central bank divergence is creating opportunities in FX, with the Dollar under pressure while other major currencies see relative support.

Disclaimer

Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.