USD remains a tough sell even with a dovish Fed outcome USD remains a tough sell even with a dovish Fed outcome USD remains a tough sell even with a dovish Fed outcome

USD remains a tough sell even with a dovish Fed outcome

Forex 4 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  While headlines could suggest that the Fed meeting remains a non-event, we are still tuned in for any dovish hints. More confidence in the path of inflation could spell real rate concerns, and more elaborate QT fine-tuning discussions could also be key. However, these signals may not be the green light that dollar bears are waiting for, with weak ex-US growth and seasonality still keeping the dollar a buy on dips.

The key theme running in the markets right now is that of disinflation. However, the US economic resilience continues to defy expectations, boosting Goldilocks. Goldilocks, a reference to the fairy-tale, refers to the current macro conditions being neither too hot nor too cold. It is the perfect scenario where growth and inflation are cooling, but not too fast to raise any recession risks. In essence, it is the soft landing scenario that every central bank hopes to achieve.

However, it is worth noting that soft-landing hopes usually pick up before an actual recession. We talked about the divergence between the signals from hard and soft economic data out of the US in this article, and unless hard data starts to show weakening trends, markets may continue to bet on a soft landing. Market expectations of the March meeting also confirm this confusion, with 50% odds seen for a rate cut cycle to begin.

With this macro backdrop in place, let’s understand what to expect from the FOMC meeting this week, and how that can move the FX markets.

FOMC will likely be a non-event on the headlines

The Fed meeting is expected to result in no change in interest rates or guidance. Will that mean FOMC meeting is a non-event? Focus will be on the post-meeting press conference from Fed Chair Jerome Powell. Our Head of Fixed Income Strategy has published an FOMC preview, and our key views are summarized here:

  • The rotation in Fed voting committee sees the addition of more hawkish members such as Mester, Bostic, Barkin and Daly. Recent commentaries from these new members have tilted hawkish, with Mester explicitly noting that March is too early for a rate cut in her view, while Bostic outlined Q3 as his base case for the first cut. Barkin has not specified a timeline for cuts but noted that progress on inflation has remained narrow and focused on goods while Daly said it’s “premature” to think that rate cuts are around the corner.
  • Disinflation and growth resilience means there may not be an immediate pressure on the Fed to act and data-dependency will likely be emphasized. However, any optimism about progress on inflation will bring the focus back to increasing real rates (nominal rates – inflation) which will prove to be unnecessarily restrictive and could be threat to real growth in the coming quarters. This suggests that being increasingly comfortable with inflation will be a dovish signal for the markets.
  • The other dovish signal in the FOMC can come from more elaborate QT discussions. Tweaks to QT are likely to come ahead of rate cuts.

FX market implications

With the risk/reward tilted towards a dovish Fed outcome, the next question is whether it could bring dollar downside? As we have argued before, an entrenched bearish dollar trend needs to meet two conditions:

  1. an easing Fed cycle
  2. strong ex-US growth

While we may be getting close to the first one here, dollar remains a tough sell because of worse economic conditions in other major economies and the high yield that USD continues to offer for now.

Tactically, the FOMC meeting could be a dollar negative, and high-beta FX pairs such as AUD and NZD could benefit, along with GBP that has been holding up well due to the expectation that BOE could have room to stay hawkish for now. However, event risk from BOE meeting on Thursday could cap gains in sterling. EM FX and Gold/Silver could also be the beneficiaries of lower yields and dollar.

But more importantly, dollar remains a buy on dips with hard landing risks seen rising in the Eurozone or also Canada if their central banks delayed easing measures into H2. This continues to point towards a bearish outlook for EUR and CAD, although oil price risks could keep CAD supported for now. DXY index could find support at the 50DMA at 102.92, with EURUSD could take another stab at breaking below the 1.08 support with 100DMA at 1.0779 coming in view.

Source: Bloomberg, Saxo

Still, worth noting that equity sentiment is a key driver of FX markets lately, more so than yields, and the megacap earnings announcements due this week could remain a key driver for where the dollar goes. As a general rule, earnings outperformance could boost equity markets and risk sentiment, and that is a dollar negative. Any risks of misses in the earnings announcements could weigh on the broader equity sentiment, and that could bring a safety bid to the dollar. So, dollar exposure can serve as a hedge against portfolio risk tilted towards big tech earnings this week.

Seasonality also supports a strong dollar

Start of the year is also seasonally a strong one for the dollar, as a recovery for the decline at the end of the year. The simple explanation for this is that most US companies usually transfer out cash to the balance sheet of their overseas subsidiaries at the end of the year to save on tax liabilities. The smaller the amount of cash on their balance sheet at the end of the year, the lower their taxes. This results in a seasonally weak dollar at the end of the year, and the start of the new year usually brings some bit of a reversal for this trend as companies likely transfer sizeable amounts back to the US. As the chart below shows, DXY returns in January and February have averaged 0.4% and 0.3% respectively in the last 23 years. Worth noting however that the decline in USD in December 2023 was 2.1%, much worse than the average of -0.9%. Consequently DXY is looking to end the month with MTD gains of 2.1%, against average of 0.4%. This could imply strong gains in February as well, before the tide turns.


The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.