The probability of the Federal Reserve cutting interest rates to zero by 2026 has surged; how long can the dollar stay above the 98 level?

Reuters Finance APP News — On Monday, May 11, the US dollar index traded around 98 in European morning trading, significantly below April’s high. As the Middle East situation continues to push energy prices higher, US April employment data exceeded expectations, and market expectations for Fed rate cuts have shifted further into the future. Several international investment banks’ latest reports show that the number of rate cuts in 2026 has been sharply reduced or pushed back to 2027, with traders closely watching the persistence of inflation and the resilience of the labor market to gauge the support for the dollar index.

Recent Trends and Technical Features of the US Dollar Index

The daily chart of the dollar index shows that in April it briefly touched above 100.6 before entering a volatile downward channel. The middle band of the Bollinger Bands is at 98.5041, the upper band at 99.5024, and the lower band at 97.5058. The current price is approaching the lower band, indicating a narrowing of short-term fluctuation range. The MACD indicator’s DIFF value is -0.2331, DEA is -0.1985, and the MACD histogram is -0.0692, remaining below zero with a continued green bar, indicating weak momentum.

Prices briefly rebounded to 99.0920 but were quickly resisted and fell back to a low of 97.6229. Since May, the index has been oscillating within the 97.50-98.50 range. Technically, the 98 level remains an important psychological support. If it holds, a rebound toward the middle band may occur; if it breaks below the lower band at 97.5058, further downside could open. Traders are watching for a breakout after Bollinger Bands narrow and whether MACD shows divergence signals.

Major Investment Banks Downgrade Fed Rate Cut Expectations for 2026

Recently, Bank of America Global Research and Goldman Sachs have adjusted their forecasts. On May 8, Bank of America Global Research completely removed the expectation of a rate cut in 2026, instead predicting cuts of 25 basis points in July and September 2027. Goldman Sachs has delayed its first rate cut from September 2026 to December, with another cut in March 2027.

Both institutions jointly point out that high energy prices keep core PCE year-over-year inflation around 3%, well above the 2% target, and combined with the labor market not weakening enough, the Fed is unlikely to start easing in 2026. Other banks’ forecasts are more divided; some believe zero rate cuts in 2026, while a few still expect limited easing, but the overall trend is to delay rather than accelerate.

The above adjustments directly reflect market pricing in a “higher for longer” interest rate path.

Outlook on Monetary Policy Amid Strong Employment and Inflation Pressures

In April, non-farm payrolls increased by 115k, well above expectations, with the unemployment rate steady at 4.3%. Wage growth remains persistent, indicating labor market resilience beyond expectations. The Fed’s April 29 meeting maintained interest rates at 3.50%-3.75% with an unusual 8-4 vote. Regarding inflation, energy costs continue to pass through to the March PCE year-over-year, which remains high, with core readings approaching 3%.

Market expectations suggest that incoming Fed Chair Powell leans toward lower rates, but many investment banks emphasize that current data do not support immediate action. Traders observe that Fed officials repeatedly emphasize data dependence; any rate cut would require clear signals of sustained inflation decline and significant cooling of the labor market. Currently, the CME FedWatch tool shows that the probability of maintaining the current rate range throughout the year remains dominant.

Impact of Rising Energy Prices and Geopolitical Factors on the Dollar Index

The Middle East situation has persisted for ten weeks, significantly boosting energy prices, directly raising US import costs and overall inflation expectations. Rising oil prices not only affect the composition of PCE but also transmit through supply chains to core inflation, prompting the Fed to remain cautious in policy. As a reserve currency, the dollar maintains a relative interest rate advantage in a high-rate environment. Although recent prices have retreated, the fundamental support has not disappeared.

Traders continue to monitor employment, CPI, and geopolitical developments, as these variables will jointly determine whether the dollar index can break through the 98 level and how volatile subsequent movements may be.

FAQs

Question 1: Why are major banks collectively delaying their expectations for Fed rate cuts in 2026?

Answer: The main reason is that high energy prices cause inflation to be sticky, with core PCE year-over-year expected to stay near 3% throughout the year, well above the 2% target. Additionally, April’s non-farm employment data was stronger than expected, and the unemployment rate remained steady at 4.3%, indicating the labor market has not weakened enough. Banks believe that only after oil prices stabilize, monthly inflation data clearly decline, and employment cools further, will rate cuts be possible, thus delaying the first move to late 2026 or 2027.

Question 2: What potential impact does Powell’s upcoming appointment as Fed Chair have on policy direction?

Answer: Analysts suggest Powell favors a lower interest rate path, but current data clearly do not support immediate easing. Banks emphasize that policy will remain highly data-dependent; only when inflation approaches the target and the labor market shows significant cooling could easing occur. Therefore, in the short term, the high-rate support for the dollar index is likely to persist.