Hawkish Fed Holds Rates Steady, Dollar Index in Wave (2) Correction

The Federal Reserve maintained its hawkish stance, keeping rates unchanged while signaling a slower path to cuts, as the U.S. Dollar Index (DXY) corrects in Wave (2) before another potential downside move.

Market Analyst
Jan 30, 2025
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Markets React as Fed Signals No Rush to Cut Rates

The Federal Reserve left interest rates unchanged at 4.25%-4.50%, reinforcing its hawkish stance amid robust economic activity, a strong labor market, and sticky inflation. In yesterday’s FOMC meeting, Chair Jerome Powell made it clear that while rate cuts are likely in 2025, the central bank needs to see a more pronounced softening in economic data before making any moves.

The U.S. Dollar Index (DXY) initially saw a brief lift following the Fed’s statement but has since retreated, aligning with the broader Elliott Wave structure, which suggests we are in a Wave (2) correction, setting up for another potential move lower.

Key Takeaways from the Fed’s Decision

  • Rates on Hold: No surprise as the Fed kept the funds rate at 4.25%-4.50% after 100bps of cuts in late 2024.
  • Hawkish Tone: The Fed removed its previous statement that inflation had “made progress,” now stating that inflation remains “somewhat elevated”.
  • Trump Factor: President Donald Trump has been pushing for immediate rate cuts, citing lower oil prices and global economic conditions, but the Fed appears determined to stick to its own roadmap.
  • Slower Rate Cuts Expected: Powell hinted that rate cuts could begin in the second half of 2025, a more gradual approach than some had anticipated.

Market Impact: DXY in a Wave (2) Pullback

The U.S. Dollar Index (DXY), which surged to 110 in early January, is now experiencing a Wave (2) correction, as seen in the 4-hour chart. The structure indicates that after completing Wave (1) down, we are in a short-term retracement phase before another leg lower.

  • Support Levels: The 107.50-108.00 zone is a key area to watch for potential resistance.
  • Bearish Continuation Ahead? If the Elliott Wave structure plays out, the next downward move in the dollar could bring DXY back below 106 in the coming weeks.
  • Key Risks: Friday’s Core PCE inflation data and Trump’s potential tariff actions on China, Mexico, and Canada could impact the dollar’s trajectory.

Looking Ahead

Markets will closely monitor upcoming GDP data, inflation reports, and any further hints from Fed officials regarding the future path of monetary policy. The DXY remains at a critical juncture, with the current correction likely setting the stage for another decline. Traders should stay alert to key support levels and macroeconomic catalysts.

Bottom Line: The Fed’s hawkish hold suggests a delayed easing cycle, pressuring the dollar. If the Wave (2) correction completes, the DXY could be in for another leg lower in the weeks ahead.

Disclaimer: For educational purposes only. Trading comes with substantial risk, leading to possible loss of your capital. Traders are advised to do their own due diligence before investing.