Investing.com -- The dollar has strengthened, while bonds and small-cap stocks have weakened amid expectations the Federal Reserve could deliver a "hawkish cut," but BTIG flags the risk of a reversal on Fed decision day.
"The chatter for this month's meeting is a 'hawkish cut,'" BTIG said in a recent note, referring to expectations for a 25 basis point rate cut but with a less dovish outlook for further reductions.
Ahead of Wednesday's Fed decision, the market has been "pre-trading" expectations for a hawkish cut, BTIG added, noting a "stronger dollar, weaker bonds, and weak small-cap/value performance over the last couple of weeks."
This creates potential for a reversal around Wednesday's meeting, BTIG said, coinciding with a strong seasonal pattern for small-caps that runs through January.
If the Fed's communication is hawkish, it could lead to a "stronger dollar and further weakness in bonds and small-cap stocks," according to BTIG.
For the dollar, meanwhile, expectations are building for a consolidation phase post-meeting. Since September, the greenback has seen fluctuations typical of a "buy the rumor, sell the news" scenario as the market prepares for the Fed's decision, BITG said.
While the dollar's strength has cooled somewhat, BTIG said that traders should be ready for possible shifts in market dynamics following the rate decision.