Dollar: fragile equilibrium ahead of Fed decision

[Ben Graham]

The US dollar managed to recover during the first half of today's trading session, with the USDX rising from Tuesday's low (the weakest since March 2022) at 95.52 to the current level near 96.20.

Nonetheless, the dollar remains under pressure, and the USD index is still in a global bear market, trading below the strategic support area at 96.80 (monthly EMA200). Current action suggests the dollar's recovery is corrective in nature, while the overall trend remains bearish.

Today, the market's focus is the Fed's first meeting of the year; the policy decision will be released at 19:00 GMT. Below we review the dollar's prospects — its weaknesses and potential supports.

Negative factors

• Structural weaknesses. Economists point to long?term structural pressures on the dollar: growing distrust of US trade and foreign policy, politicization of the Fed and deteriorating fiscal discipline. These factors outweigh a more neutral cyclical backdrop.
• Expectations of Fed easing. Markets are virtually certain (97% probability per CME FedWatch) that the policy rate will be left in the 3.50%–3.75% range, yet they already price in a cut in March (15% chance) and two additional cuts during 2026. Such expectations remove a key source of dollar support.

• Political uncertainty. President Trump's statements about soon naming a new Fed chair and his predictions of rate cuts under a new chair raise fears about the Fed's independence, a clear negative for the currency. Market debate over a possible replacement for the Fed chair, Trump's public comments about lowering rates and his benign stance toward a weaker dollar as a tool to support US exports and industry ("The dollar is fine," he recently said) all increase uncertainty, raise volatility, and weigh on dollar demand vs. major currencies.

Supportive factors

• Short?term technical correction. The intraday recovery (in the morning) looks like a "rumor correction," when some speculators close short positions ahead of a major event.
• Chance of a hawkish surprise. If Chairman Powell emphasizes persistent inflationary risks and labor?market strength at the press conference, the dollar could receive a temporary boost.

Although the dollar appears fundamentally undervalued relative to rate differentials, a number of longer?term factors — notably deteriorating US fiscal credibility, rising public debt, waning confidence in trade and foreign policy and fears over the Fed's independence — continue to exert downward pressure that offsets short?term macro positives and keeps the dollar in a downward trend.

Technical picture of USDX

Despite today's bounce, the dollar remains vulnerable.

Key resistance: 96.80. A return and hold above that level is necessary to negate the immediate risk of a deeper decline.

Immediate support: 95.52 (yesterday's low). A break below this level would open the way to deeper lows, potentially testing 95.00 – 94.50 – 94.00.

Medium?term outlook

The balance of risks favors further dollar weakness. Structural drivers and easing expectations create a strong downward bias. Any strengthening is likely to be temporary and corrective unless the Fed makes a decisive hawkish pivot — which appears unlikely at this stage.

Conclusion

The US dollar is in a difficult transition phase. Despite intermittent bounces, the overall trend is downward, and the market is increasingly focused on Fed easing prospects and political risks. Today's short?term dynamics hinge on Jerome Powell's tone. Beyond the meeting, however, a complex environment remains: political pressure on the Fed, a growing fiscal deficit and rate?cut expectations will continue to shape a bearish outlook.

Investors should prepare for elevated volatility around the Fed decision, the press conference and the day after. Dollar prospects will only clear up after the meeting's outcome and the identity of the next Fed chair are known. These facts will ultimately define monetary policy for years to come. For now, the trend confirms dollar weakness, and any recovery should be viewed as a selling opportunity.

The material has been provided by InstaForex Company - www.instaforex.com