Dollar pauses ahead of Fed amid rising policy and geopolitical tensions

The US dollar paused its upward momentum on Wednesday after a four-day winning streak, trading just below the 99.00 level as global markets entered a cautious holding pattern ahead of the Federal Reserve’s policy decision. This temporary lull in the dollar’s momentum does not necessarily suggest a reversal, but rather highlights the heightened anticipation among investors awaiting the outcome of the FOMC meeting scheduled to conclude later today. Markets widely expect the Fed to keep its benchmark interest rates unchanged within the current 4.25%–4.50% range, with CME FedWatch Tool pricing in a 97% chance of no change. However, the real concern lies not in the decision itself but in the tone the Fed will adopt regarding its future trajectory, especially amid growing expectations for a potential rate cut in the final quarter of the year.

Investors are eager for any indication of a shift in the Fed’s monetary stance, particularly given the mixed macroeconomic signals emerging from the United States. While the labor market has remained relatively resilient, inflation data and broader economic indicators have shown uneven momentum. Thursday’s release of the Q2 Personal Consumption Expenditures (PCE) inflation data, along with Friday’s Non-Farm Payrolls (NFP) report, will serve as crucial benchmarks for assessing whether the US economy can continue to expand without requiring further tightening. Even a slight deviation in Fed Chair Jerome Powell’s language during his post-decision press conference at 21:30 GMT+3 could have immediate and significant repercussions for the dollar and global risk sentiment.

At the same time, the Fed faces growing political pressure from the White House, as President Donald Trump has once again publicly criticized Fed Chair Powell in what appears to be a renewed effort to sway monetary policy toward rate cuts. While such political interference is not new, it has rekindled concerns about the Fed’s independence—an issue of critical importance that could potentially undermine international market confidence in the credibility of the US monetary framework. Although speculation about Trump potentially moving to oust Powell has receded for now, the revival of these threats has added a fresh layer of uncertainty.

Away from monetary policy, the ongoing trade discussions between the US and China continue to shape the broader macroeconomic narrative. Recent talks held in Stockholm between both sides ended without a clear agreement to extend the existing tariff truce, and with the deadline just two weeks away, markets are watching closely. US Treasury Secretary Scott Besant confirmed that dialogue with the Chinese continues but noted that the final decision rests with President Trump. While Trump has hinted at the possibility of an extension—briefly soothing fears of renewed trade tensions—clarity remains elusive. Meanwhile, the recently concluded trade agreement between the US and the European Union adds a layer of optimism, but it remains insufficient to provide short-term market conviction without clearer Fed guidance.

Against this backdrop, the US Dollar Index finds itself caught between competing forces. On one side, strong macroeconomic data and fresh trade deals continue to support bullish momentum. On the other, political interference and uncertainty surrounding the Fed’s next move are pushing investors toward caution. The result is a tense standoff that makes today’s Fed decision a potentially pivotal event—one that could redefine the dollar’s direction in the coming weeks and reshape global market sentiment if Powell’s tone diverges even slightly from the market’s dovish expectations.