US Dollar Forecast: DXY Recovers from Multi-Year Lows as Fed Decision Looms

Dollar Index Rebounds Ahead of Critical Fed Decision

The U.S. Dollar Index is bouncing back on Wednesday after hitting its lowest level at 95.551 since February 2022 the previous session. On Tuesday, comments from President Trump triggered a steep decline, but today’s price action suggests traders are squaring positions ahead of the Federal Reserve’s interest rate decision and monetary policy statement at 19:00 GMT.

At 12:51 GMT, DXY is trading 96.183, up 0.305 or +0.38%.

Trump’s Rhetoric Rattles Currency Markets

The dollar has been falling hard since Monday, January 19, but prices still took a hard hit yesterday as comments from U.S. President Trump intensified investor concerns about the greenback.

Trump commented that the value of the dollar is “great” when asked about its recent plunge on Tuesday, rattling investors enough to think the administration is content with a cheaper currency, since they believed it made U.S. goods and services more competitive.

Policy Uncertainty Weighs on Greenback Strength

Traders are blaming the greenback’s weakness on Trump’s unpredictable economic policymaking and relentless pressure on Fed Chair Jerome Powell to lower interest rates even though the economy was relatively strong.

Markets Brace for Fed Announcement and Powell’s Guidance

Despite early gains, traders are watching for volatility when the Fed releases its latest interest rate decision later today. Based on market expectations and Fed member remarks, there is nearly a zero-percent chance the U.S. central bank will lower its benchmark interest rate on Wednesday.

Besides the rate decision, traders are also looking forward to post-announcement remarks from Powell. They are hoping he offers more insight into the timing of the Fed’s next cut, although most analysts believe Powell won’t waver from his current stance that the decision will be labor market and inflation dependent.

A “Wait-and-See” Meeting for the Central Bank

“Overall, the Fed just wants to stand pat. They feel they’ve got time to wait and see,” former Fed Vice Chair Roger Ferguson said in a CNBC interview Monday. “This feels like a wait-and-see meeting, and we should all be listening to see if there’s any hint or a bias towards a future action.”

The Fed may not cut rates at this meeting; however, traders are still calling for two cuts this year, and the expectation numbers are strong enough to keep the downside pressure on the U.S. Dollar.

Technical Outlook: Downtrend Intact with Retracement Potential

From a technical position, the trend is down and we won’t see a change in the trend until 99.492 is recovered. Meanwhile, a trade through 95.551 will signal a resumption of the sell-off with 95.137 the next objective. Nonetheless, due to the recent steep sell-off, there is room to the upside for a retracement—not because sentiment is shifting, but to alleviate some of the downside pressure.

“Sell-the-Rally” Remains the Optimal Strategy

While conditions are ripe for a short-covering rally, it may be difficult to catch a counter-trend rally, but since the long-term outlook is bearish, “sell-the-rally” is still the best strategy even at multi-year price levels.

More Information in our Economic Calendar.