The US Dollar Index (DXY) has bounced back to 96.00 after a downturn. Traders are adjusting their positions ahead of the Federal Open Market Committee (FOMC) meeting. The dollar gained against the New Zealand Dollar but weakened against the Euro and the British Pound.

Impact of the Federal Reserve

The Federal Reserve is expected to keep interest rates steady, but all eyes are on Fed Chair Jerome Powell for hints about future moves. Many in the market anticipate more rate cuts in 2026, which could influence the dollar’s value. Concerns about the Fed’s independence and possible actions from President Trump may also restrict the dollar’s strength. We are observing some adjustments in the US Dollar Index as the Fed decision approaches, bringing it back to the 96.00 mark. This appears to be short-covering, not a significant change in sentiment, as the overall outlook remains negative. Derivative traders might see this increase as a chance to set up new short positions at better levels. The market is eager for signs of at least two more rate cuts this year, supported by recent economic data. The December 2025 Consumer Price Index (CPI) report indicated that inflation has cooled to 2.8%, giving the Federal Reserve room to lower policies further. The CME FedWatch Tool shows a greater than 70% probability of a rate cut by the March meeting, indicating ongoing pressure on the dollar. Political uncertainty adds more risk, which could limit any significant rallies for the dollar. Concerns about the Federal Reserve’s autonomy and recent hints from the administration about restarting trade tariff talks with the European Union are dampening market sentiment. This can shift investments towards safer options like the Japanese Yen and Swiss Franc, skipping the dollar.

Planning Currency Strategies

With potential for increased volatility after the Fed announcement and ongoing political events, buying put options on USD-related pairs like USD/JPY may be a wise move. This strategy helps traders benefit from a fall in the dollar while clearly defining their maximum risk. Consider options that expire after the March FOMC meeting to take advantage of the anticipated first rate cut. The dollar is showing general weakness against major currencies, especially the Euro and Japanese Yen. Traders might think about selling DXY futures contracts if the index struggles to stay above 96.00 after the Fed’s announcement. Another approach is to consider currency pairs that exclude the dollar, such as going long on EUR/JPY, which could help benefit from overall market trends while avoiding the risks tied to US events. This situation mirrors what we saw in late 2020 and early 2021, when a very supportive Fed policy led to a prolonged period of dollar decline. Last week’s technical drop below the important 97.00 support level strengthens this negative outlook. Historical trends suggest that the dollar’s path likely leans downward in the coming weeks. Create your live VT Markets account and start trading now.

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