US Dollar weakens as markets digest Fed decision and GDP miss

FXStreetJan 30, 2025 6:23 PM

The US Dollar remains soft after the Fed left rates unchanged and revised its inflation assessment.
US GDP growth slowed to 2.3% in Q4, missing forecasts of 2.6% and down from 3.1% in Q3.
The Fed removed prior language on inflation progress, stating it remains “somewhat elevated.”
Powell’s mixed messaging led to uncertainty, initially pushing the DXY higher before erasing gains.

The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, hovers below 108.00 as traders react to the Federal Reserve’s (Fed) latest decision and a weaker-than-expected US Gross Domestic Product (GDP) print. The Fed maintained its policy stance but removed previous references to inflation making progress toward the 2% goal, sparking hawkish speculation.

However, Powell later downplayed this shift, calling it a “language cleanup,” which softened the initial market reaction. Meanwhile, GDP growth missed expectations, while inflation components within the report suggested underlying price pressures persist.

Daily digest market movers: US Dollar struggles as GDP miss fuels uncertainty

The Federal Reserve held interest rates steady at 4.25%-4.50% as widely expected but removed prior language stating that inflation was making progress toward the 2% target. This adjustment was initially seen as hawkish before Powell downplayed its significance.
During the press conference, Powell clarified that the inflation language change was merely a “language cleanup” and not an intentional policy shift. His comments softened the market's hawkish reaction and led to a pullback in the US Dollar.
Powell emphasized that the policy stance remains restrictive and that rate decisions will be data-dependent. He refrained from signaling any urgency to cut rates, reinforcing the Fed’s cautious approach.
The United States Q4 GDP growth slowed to 2.3%, missing the 2.6% forecast and falling from 3.1% in Q3. This lower-than-expected reading raised concerns about slowing economic momentum.
The Personal Consumption Expenditure (PCE) price index rose to 2.3%, accelerating from 1.5% in the prior quarter, suggesting that inflation remains persistent despite the overall GDP slowdown.
Core PCE, the Fed’s preferred inflation measure, remained unchanged at 2.2%, missing expectations for 2.5%. This softer-than-expected inflation reading fueled mixed reactions in the market.
Initial Jobless Claims dropped to 207,000 for the most recent week, below estimates of 220,000 and down from the prior week’s 223,000 reading, signaling continued strength in the labor market.
Continuing Jobless Claims declined to 1.858 million from 1.900 million, suggesting that job market conditions remain stable despite broader economic uncertainty.

DXY technical outlook: Dollar struggles to hold 108.00

The US Dollar Index attempted to recover above 108.00 but remains under pressure as traders reassess Fed policy signals. The Relative Strength Index (RSI) is still below 50, indicating weak bullish momentum, while the MACD’s red bars show ongoing bearish pressure.

The index risks further downside if it fails to hold 107.80, with potential support at 107.50. However, if sentiment shifts, resistance near 108.50 could cap gains before any meaningful rally.

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.