US Dollar firms as markets brace for Fed decision

FXStreetJan 29, 2025 6:32 PM

The US Dollar Index climbs near 108.20 ahead of the Federal Reserve’s policy announcement.
The Fed is expected to hold rates steady at 4.25%-4.50%, with Powell’s guidance in focus.
Investors assess how Trump’s economic policies, including proposed 25% tariffs on Canada and Mexico, could shape monetary policy.
Weak consumer confidence and durable goods orders add uncertainty to the Fed's outlook.

The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, extends its recovery above 108.00 as investors await the Federal Reserve’s (Fed) monetary policy decision. Markets expect the central bank to leave rates unchanged, but Chair Jerome Powell’s remarks could be key in shaping rate expectations. With United States (US) President Donald Trump’s proposed tariffs on Canada and Mexico adding further uncertainty, traders are keen to gauge the Fed’s stance on inflation and growth.

Daily digest market movers: US Dollar steadies ahead of key Fed meeting

The Federal Reserve is widely anticipated to maintain its current interest rate at 4.25%-4.50%.
Powell’s presser in focus: Investors will watch for signals on whether the Fed could leave a March rate cut on the table.
As for now, the CME FedWatch Tool indicates a 33% chance of a rate reduction in March, up from previous estimates.
Datawise, the Atlanta Fed’s GDPNow model raised Q4 growth estimates to 3.2% SAAR from 3.0%.
The first official reading of Q4 GDP is due tomorrow, with consensus at 2.6% vs. 3.1% in Q3.
Inflation remains a concern: Above-trend growth and persistent price pressures could deter the Fed from cutting rates soon.

DXY technical outlook: Resilience above 108.00, but caution remains

The Dollar Index remains on solid footing above 108.00, showing signs of stabilization ahead of the Fed’s policy announcement. However, momentum indicators reflect mixed signals. The Relative Strength Index (RSI) remains below 50, suggesting limited bullish strength, while the MACD’s red bars indicate ongoing selling pressure. If the DXY maintains its current position, further gains toward 108.50 are possible. A break below 107.50 would open the door for additional losses.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Disclaimer: For information purposes only. Past performance is not indicative of future results.