Dollar Strengthens Amid Fed Rate Cut Uncertainty: What FOMC Meeting Data Reveals

The dollar index surged to a fresh 1-month high on Friday, gaining +0.20% as markets recalibrate expectations around the Federal Reserve’s monetary policy trajectory. The shift reflects a fundamental reassessment: with less likelihood of aggressive rate cuts ahead, the greenback found renewed footing amid mixed but ultimately hawkish economic signals.

Economic Data Shifts Rate Cut Narrative

The labor market painted a nuanced picture that ultimately supported dollar strength. December nonfarm payrolls increased by 50,000, trailing expectations of 70,000, which initially appeared dovish. However, the unemployment rate tightened to 4.4%—below the anticipated 4.5%—signaling underlying labor market resilience. Most notably, average hourly earnings climbed +3.8% year-over-year, exceeding the +3.6% forecast, a figure that carries significant weight for inflation-conscious policymakers.

November payroll figures were also revised downward to 56,000 from 64,000, yet these softer employment numbers were offset by persistent wage pressures. Consumer sentiment proved stronger than expected, with the University of Michigan’s January index rising to 54.0 versus 53.5 anticipated, indicating households remain relatively optimistic despite economic crosscurrents.

The hawkish-leaning data reinforced an important market conclusion: the FOMC meeting scheduled for January 27-28 is unlikely to deliver rate cuts. Market pricing now assigns just a 5% probability to a -25 basis point cut, a stark contrast to earlier expectations for multiple reductions this quarter.

Fed Policy Expectations and the Dollar’s Fundamental Backdrop

Looking further ahead, the FOMC’s broader policy path reveals why the dollar maintains upward pressure despite underlying structural headwinds. Markets are currently pricing in roughly -50 basis points of cuts for full-year 2026, yet this remains modest compared to other central banks. The Bank of Japan is expected to tighten by approximately +25 basis points in 2026, while the European Central Bank is likely to hold rates steady.

This differential—with the Fed cutting modestly while peers remain steady or tighten—creates an interest rate advantage favoring dollar-denominated assets. However, this advantage is being challenged by several countervailing factors. The Fed’s liquidity injection program, which commenced with $40 billion monthly Treasury bill purchases in mid-December, technically weakens long-term dollar fundamentals by expanding money supply.

A more substantial headwind emerges from succession uncertainty at the Federal Reserve. Reports suggest President Trump intends to announce his choice for the next Fed Chair in early 2026, with speculation pointing toward dovish-oriented candidates. Bloomberg noted that National Economic Council Director Kevin Hasselt represents the most dovish option under consideration—a prospect that weighs on dollar bulls positioning for sustained rate advantages.

Euro Navigates Dollar Strength, Eurozone Data Stabilizes

The EUR/USD pair declined to a 1-month low, closing -0.21% as dollar momentum dominated. Nonetheless, euro losses were constrained after stronger-than-expected Eurozone data offered counterbalance. November retail sales advanced +0.2% month-over-month against expectations of +0.1%, while October figures were revised upward to +0.3%.

German industrial production delivered a surprise, rising +0.8% in November when forecasts had predicted a -0.7% decline. These improvements signal underlying economic resilience in Europe’s largest economy, providing some support for the euro despite dollar headwinds.

ECB Governing Council member Dimitar Radev reinforced the Bank’s patient stance, remarking that “the current level of interest rates can be assessed as appropriate in terms of the available information and the inflation outlook.” Markets reflect minimal expectations for ECB action, with swaps pricing in just a 1% probability of a +25 basis point hike at the February 5 policy meeting.

Yen Under Pressure from Policy Divergence and Geopolitical Strains

The USD/JPY pair surged +0.66%, with the yen tumbling to a 1-year low against the dollar. The trigger: Bloomberg reported that the Bank of Japan will hold rates steady at this month’s policy gathering despite revising its economic growth projection upward—a dovish hold that disappointed yen bulls. The 0% probability of a BOJ rate hike at the January 23 meeting reflects market consensus for continued accommodation.

Political uncertainty magnified yen weakness after reports surfaced that Prime Minister Takaichi is contemplating dissolution of the lower house of the National Diet. Meanwhile, escalating China-Japan tensions weighed heavily on sentiment. China announced export controls on items with potential military applications destined for Japan—retaliation for Japanese PM comments regarding potential conflict scenarios should China invade Taiwan. These supply chain concerns could undermine Japan’s economic trajectory.

Offsetting some yen pressure, Japan’s November leading economic index rose +0.7 to 110.5, hitting a 1.5-year high and matching expectations precisely. More impressively, November household spending jumped +2.9% year-over-year, crushing estimates of -1.0% and marking the largest six-month increase. These data offer some support for the yen but fail to overcome structural policy divergence with the Fed.

Fiscal pressures also bear watching: Prime Minister Takaichi’s administration approved a record 122.3 trillion-yen ($780 billion) budget for next fiscal year, with defense spending allocated to historically elevated levels—a factor that could eventually pressure the currency as increased government borrowing weighs on external accounts.

Precious Metals Rally Despite Dollar Strength

February COMEX gold futures closed up +40.20 (+0.90%), while March silver surged +4.197 (+5.59%), defying the dollar’s Friday strength. The catalyst: President Trump directed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities, a quasi-quantitative easing measure designed to lower borrowing costs and stimulate housing demand.

This bond-buying initiative provided substantial support for precious metals as alternative stores of value amid anticipated monetary expansion. Safe-haven demand remained robust given lingering uncertainty surrounding U.S. tariff policy and geopolitical risks spanning Ukraine, the Middle East, and Venezuela.

Concerns that the incoming Fed Chair might favor easier monetary policy—should Trump appoint a dovish successor—provide additional tailwinds for metals as insurance against currency debasement. The Fed’s ongoing liquidity injections similarly support precious metals demand by expanding financial system liquidity.

Counterweights emerged, however. Friday’s dollar index rally to 4-week highs proved headwind, as stronger greenback readings typically reduce precious metals’ appeal to foreign buyers. Additionally, major commodity index reweighting poses technical downside risks. Citigroup estimates potential outflows of roughly $6.8 billion from gold futures contracts and similar amounts from silver holdings over the coming week as the BCOM and S&P GCSI indexes rebalance.

The S&P 500’s surge to record highs also eroded safe-haven flows into metals, as equity strength typically diminishes precious metals allocation.

Central Bank Demand Remains Resilient Support

Structural support persists from official sector accumulation. China’s central bank expanded its gold reserves by 30,000 ounces to 74.15 million troy ounces in December—marking the fourteenth consecutive monthly increase. Global central banks purchased 220 metric tons of gold during Q3, up +28% from Q2 according to the World Gold Council, demonstrating sustained institutional demand.

Fund positioning similarly underpins prices. Gold ETF long positions climbed to a 3.25-year high on Thursday, while silver ETF holdings reached a 3.5-year high on December 23, signaling sustained retail and institutional conviction around precious metals’ forward trajectory.

The interplay between these supporting forces and technical headwinds leaves precious metals at a critical juncture heading into the FOMC meeting period and beyond.