The Dollar is approaching the FOMC decision with weak momentum, despite recent statements from President Trump. Over the past three months, there has been a marginal net-buying trend, though there are indications of weakening.
Market Position
According to BNY, the Dollar is in a stronger position compared to the time before the last FOMC decision, but hedges remain above the 12-month average. The flow magnitudes do not suggest a major “sell U.S.” trend, with only a cautious “hedge the dollar” stance present but lacking strong conviction.
We’re seeing the Dollar enter this week’s FOMC meeting with weak momentum, much like we observed in similar uncertain periods back in 2025. Recent data showing December’s CPI holding firm at 2.8% while Q4 GDP growth slowed to 1.5% creates a difficult situation for the central bank. This underlying uncertainty is pressuring the dollar as traders are unsure of the Fed’s next move.
We are not seeing signs of panic selling, but hedging activity is noticeably high, with currency volatility indexes ticking up toward their 12-month averages. For example, implied volatility on major pairs like EUR/USD has risen over 11% in the last month alone. This suggests derivative traders are primarily buying protection rather than placing large directional bets against U.S. assets.
This environment favors strategies that protect against downside risk in the dollar without requiring strong conviction. Traders are likely increasing positions in options on currency ETFs like the Invesco DB USD Bullish Fund (UUP) to define their risk ahead of what could be a volatile Fed statement. These positions act as insurance against a surprisingly dovish tone from the committee.
Historical Analysis
Looking back at the political and economic crosscurrents of the late 2010s, we see a similar pattern of cautious positioning ahead of major events. The current “hedge the dollar” view is likely to persist until we get more clarity from the next round of inflation and employment data in February. Until then, any dollar strength will likely be viewed as an opportunity to add to defensive positions.
