FOMC Meeting Preview: Fed To Keep Rates on Hold, Implications for the DXY and Gold

[Ben Graham]

The meeting of the Federal Open Market Committee (FOMC) on January 28, 2026 will be an intriguing one.

The current economic data is showing a strange pattern that doesn't follow the usual rules: the US economy is growing very fast with estimates suggesting a massive 5.4% growth rate for Q4 but at the same time, the job market is slowing down.

Meanwhile, inflation is stuck at 3.0%, which is higher than what the central bank wants to see.

Usually, fast growth leads to higher inflation and a hot job market, but that isn't happening right now. This split could mean that businesses are becoming much more efficient and productive.

However, it could also be a warning sign that the economy is starting to "overheat" (growing too fast to be sustainable), even if it doesn't look like it yet due to temporary factors.

Heading into the meeting and market participants are pricing in around a 97% probability of a rate hold at Wednesdays meeting.

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Source: LSEG

The Political Economy of 2026

The January 2026 meeting cannot be analyzed in a vacuum of economic data. It occurs within a "storm" of political pressure that threatens the institutional integrity of the Federal Reserve.

The "Eye of the Storm"

The Rabobank report characterizes the current environment as "In the Eye of the Storm". This metaphor is apt. The "storm" is the friction between President Trump’s administration and the Federal Reserve.

• Executive Pressure: President Trump has increasingly tightened his "grip" on the Fed. His administration explicitly favors lower interest rates to boost growth and reduce the cost of servicing the national debt.
• The "Quartermaster": The report mentions a "quartermaster" named Miran—likely a key economic aide or shadow advisor—who advocated for a 50 basis point cut in December. This reveals the delta between the Fed’s action (25 bps) and the Administration’s desire (50 bps). The pressure is for more easing, faster.

The Powell Subpoena and Exit

Chair Jerome Powell is under siege. He faces a subpoena and a Department of Justice investigation.

• Unprecedented Legal Pressure: Never in modern history has a sitting Fed Chair been subject to such overt legal pressure from the executive branch. This is designed to weaken his standing and force compliance with the low-rate agenda.
• Powell's Response: Powell is expected to be defiant in the press conference, likely stating he has "said all he has to say". However, the psychological toll and the distraction are undeniable.
• The May Transition: Powell’s term as Chair ends on May 15, 2026. This date is the event horizon for monetary policy.
  • Scenario A: Powell leaves quietly. Trump appoints a loyalist.
  • Scenario B: Powell fights to stay on the Board of Governors (his term as Governor lasts until 2028). Trump has warned that Powell’s life "won't be very happy" if he does this. If Powell stays, he denies Trump a vacancy on the Board, preventing the appointment of a crucial swing vote.

The June Pivot

The forecast for a rate cut in June 2026 is heavily predicated on this political transition. Rabobank explicitly states they have "higher confidence" in a June cut because "this will be the first meeting led by the new Fed Chair".

Implication: The market is pricing in a political reaction function. The expectation is that the new Chair will be appointed with a mandate to cut rates, regardless of whether inflation is 3.0% or GDP is 5.4%. This expectation of a "politicized pivot" is a key driver of the Gold rally and Dollar weakness.

Market Implications for FX

The relationship between US politics and money is changing how the world views different currencies. Right now, the US dollar is on a downward trend for a few key reasons:

Why the Dollar is Weakening

The "Bearish" Case: The U.S. Dollar Index (an indicator of the dollar's strength) has dropped to around 97.00.

Falling Interest Rates: Even though the Federal Reserve (the US central bank) has paused some moves, investors know that interest rates are likely headed lower, potentially down to around 3.0%–3.25% by the end of the year. When interest rates in the US fall while other countries stay steady, the dollar becomes less attractive to market participants..

The "Governance Discount": Market participants are becoming worried about political friction in Washington. Specifically, public disagreements between the White House and the Federal Reserve make people feel the central bank might lose its independence. This makes the dollar seem like a riskier place to keep money.

How Other Currencies Are Reacting

The Euro (EUR/USD): The Euro has climbed to around $1.19. Experts believe it will continue to rise throughout 2026 because European interest rates are becoming more competitive compared to US rates.

The British Pound (GBP/USD): The Pound has reached its highest level in four months, hitting nearly $1.37. This is happening because the global economy seems to be heading for a "soft landing" (slowing down without a major crash), which usually helps the Pound.

The Future of the Dollar

The outlook for the dollar is shaky. If the Federal Reserve appoints a new leader who prefers lower interest rates, the dollar index could fall even further. Currently, the dollar's only real "lifelines" would be a sudden spike in US inflation (which would force rates back up) or a major global crisis that makes people run back to the dollar for safety.

However, with Gold reaching record highs above $5,100, it appears that many investors are now choosing "hard assets" like gold instead of the US dollar when they want to play it safe.

Monetary Policy Outlook

The path for the rest of 2026 is the subject of intense debate among market participants.

The consensus among analysts and market participants (2-3 cuts) is more dovish than the Fed (1 cut). This discrepancy is the source of market volatility. If the Fed sticks to its guns (1 cut), yields will rise, and equities/gold could correct.

If the Fed capitulates (3 cuts), the "melt-up" continues.

There is also the possibility that the Fed may stick to its guns of 1 cut while market participants hold their expectations steady at 2-3 cuts. In such a scenario, the immediate market reaction may be rather muted.

US Dollar Index (DXY) Chart, January 26, 2026

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Source: TradingView.Com (click image to enlarge).

Key Levels to Focus On

Support:

• 96.37
• 95.00
• 94.50

Resistance:

• 97.70
• 98.67
• 100.00

Follow Zain on Twitter/X for Additional Market News and Insights @zvawda

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