By Felipe Barragán, Expert Research Strategist at Pepperstone

 September 18, 2025 –

“The dollar spent most of Wednesday stable as investors sat tight for the Fed’s decision and, more importantly, the new “dots” and Powell’s guidance. A 25 bp cut is overwhelmingly assumed; the debate that matters for the DXY is the slope of the easing path and how much the Statement of Economic Projections (SEP) acknowledges softer labor momentum versus still-sticky components of inflation. Markets have been leaning into a weaker-USD narrative all week—euro strength pushed the dollar index toward multi-month lows—so the bar for a further leg down is a dovish combination of cuts penciled in for the next few meetings and language that downplays upside inflation risks.

Positioning into the announcement is critical. Bond traders have already hedged toward the risk of larger cumulative easing by year-end, reflecting cooling employment data—even as the “base case” is a quarter-point today. If Powell resists endorsing an aggressive cadence and stresses a data-dependent, step-by-step approach, front-end yields could retrace less and the dollar may find a bid, at least tactically. Conversely, a dots profile that sketches multiple additional cuts this year and next would likely keep the DXY under pressure as rate differentials compress further.

Two swing factors beyond the policy rate complicate the dollar’s path. First, balance-sheet signaling: even a faint nod toward easing the MBS runoff—or discussion of mortgage‐market functioning—would be read as an added loosening channel and therefore dollar-negative at the margin. Conversely, holding the current Quantitative Tightening (QT) settings firm would blunt that impulse. Second, institutional noise: questions around Fed independence and new dissents won’t set the policy rate today, but they can add volatility around the press conference and the dots, amplifying USD swings if investors perceive greater policy uncertainty.

Global context is also working against broad dollar strength. With risk assets still near highs and several central banks either on hold or inching toward their own easing cycles, “carry with a cushion” remains the dominant EM story. If the Fed delivers a tame cut and a benign path, high-carry LatAm FX such as MXN and COP should stay supported, reinforcing a softer-USD backdrop; a surprisingly hawkish dots profile would interrupt, not reverse, that trend by propping up the dollar via rate-spread expectations.

Overall, the balance of probabilities still tilts toward a soft-USD reaction if the dots validate several additional cuts and Powell emphasizes risks to growth. A more cautious script—one cut, slower cadence, and steady QT—would likely spark a relief bounce in the index; but with the dollar having already weakened into the event, any upside may prove tactical unless the SEP meaningfully reins in 2026 easing expectations.”