- The White House’s conflicting statements on additional tariffs on Chinese imports are creating volatile market conditions.
- Investors expect no immediate interest rate cuts in the first half of the year, in line with the strong performance of the US economy despite limited official statements from the Federal Reserve.
- Analysts still attribute the fundamental strength of the US dollar to the United States’ enduring economic advantage over its global counterparts.
The US dollar is trading flat on Wednesday after two days of losses as the correction aims to continue. Markets are trying to gauge the impact of the 10% tax on Chinese goods announced by President Trump on Tuesday. The US Dollar Index (DXY) is testing the 108.00 mark and is set to head to the lower end at 107.00. On the Fed side, the bank is suffering from a media blackout and with no high-level economic reports, markets are left with no direction to bet on the data-driven Fed’s next steps.
Daily summary of market drivers: Mixed signals add to tariff confusion as Fed opacity continues
- President Trump unveiled potential 10% tariffs on products coming from China, linking them to broader concerns about fentanyl flows and reiterating that other countries could face tariffs as well. This follows earlier rumors that the US administration may postpone immediate measures, highlighting the contradictory rhetoric.
- The strong backdrop for the US dollar remains primarily driven by the outstanding growth of the US economy despite the headlines on trade policy. Analysts point out that once the tariff fog clears, the US dollar could reassert its dominance.
- Fed Media Blackout: Prior to Chairman Powell’s post-decision press conference on January 29, officials remained silent. Markets widely expect one rate cut in July, consistent with strong US data.
- Uncertainty over tariffs increases volatility, however currency strategists advise traders to look beyond the daily political noise as long-term US economic momentum remains supportive of the dollar.
DXY Technical Outlook: Continued selling pressure is affecting key levels
After the bears beat the 20-day simple moving average (SMA), the outlook has turned somewhat bearish as the DXY is now vulnerable to further losses. If the DXY wants to revive its upward trajectory, it must overcome the 109.30 level convincingly.
But failure to defend near-term support levels surrounding 107.50 to 108.00 could lead to further downside. The fundamental outlook for the US dollar remains positive, supported by economic strength and dovish Fed policy outlook.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the head of the New York Fed, and four of the remaining eleven Regional Reserve Bank presidents, who serve one-year terms on a rotating basis. .
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.