Dollar Weakness Reflects Fed Policy Uncertainty Amid Regulatory Constraints

The U.S. , . ' comments about near-term rate cut potential significantly raised the probability of a December move.

This dovish shift is reinforced by the Fed's own projections. , . More aggressively, the median outlook , reflecting a materially softer stance compared to just months prior.

Despite the dollar's weakness and U.S. rate cut speculation, the euro showed remarkable resilience, . This contrasts with the dollar's decline, suggesting eurozone fundamentals remain relatively stable amid the Fed's policy pivot discussion.

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Inflation Data Gaps Complicate Policy Guidance

September's inflation reading , . However, policymakers now face an immediate hurdle: the October CPI report was canceled due to a government shutdown that disrupted data collection. This gap forces reliance on potentially outdated information during a period of evident price stickiness.

Beyond the missing data, regulatory frameworks themselves are creating friction. The Federal Reserve identifies liquidity and capital requirements as drivers of excessive demand for reserves, complicating its efforts to steer policy effectively. This regulatory dominance over monetary policy constrains balance sheet management and transmission mechanisms.

The combination of uncertain near-term inflation data and rigid regulatory structures makes calibrating monetary policy unusually challenging. While the Fed has noted ample reserves and ended balance sheet runoff, the contradictory incentives created by current rules undermine confidence in its tools. This environment demands heightened vigilance, as delayed or incomplete data coupled with complex compliance requirements risks misaligning policy actions with actual economic conditions.

Key Risks: Regulatory Constraints & Data Uncertainty

Earlier analysis highlighted the dollar's resilience and the Fed's gradual policy shift, but two persistent risks now cloud the outlook: regulatory headwinds that continue to choke credit and a data gap that will force the Fed to make big decisions with incomplete information.

Post-crisis regulatory frameworks have pushed banks to retreat from certain lending activities, shrinking credit growth and shifting activity to less regulated nonbanks. The Federal Reserve is revising banking regulations to address regulatory dominance over monetary policy, which has constrained balance sheet management and policy transmission. That constraint is a headwind for the U.S. , limiting the dollar's safe-haven appeal. The limited alternatives for banks to expand credit raise the risk that credit conditions will stay restrictive even if the Fed cuts rates.

The October 2025 CPI release was canceled due to a government shutdown, leaving the Fed without a key inflation gauge for its November meeting. The October employment report was also canceled for the same reason. The missing data forces the Fed to rely on preliminary estimates and market expectations, increasing uncertainty about the timing and size of rate cuts. The Fed's options are limited; with the data gap, policymakers may have to lean more heavily on other indicators or adopt a wait-and-see approach, which could delay any policy shift. Even if the CPI data were released, the underlying inflation trend remains uncertain, and the regulatory constraints could persist beyond the near term.

Valuation & Catalysts: Limited Upside Until Data Resolves

, driven by dovish signals from officials like New York Fed President John Williams. , creating a potential ceiling for dollar gains until that risk resolves.

The cancellation of October's CPI and employment reports due to a government shutdown has removed critical inflation and labor market data, amplifying uncertainty. While November's CPI release will retroactively include October figures, the gap in real-time data leaves markets scrambling for guidance. 's November 19 minutes offer some insight into policymakers' October thinking but lack concrete economic projections or CPI details, failing to fill the information void.

With the next major data point being December's employment reports, market positioning remains stuck. Traders await concrete validation of the Fed's rate-cut timing from labor market strength or weakness. Until then, dollar weakness may persist in a narrow range, constrained by intervention fears on the yen and uncertainty around delayed inflation data. The path to meaningful valuation shifts hinges entirely on these unresolved data points.