Don’t Discount the Possibility of a Corrective Move

The US Dollar Index Continues to Soar

• The US Dollar Index reaches its eighth weekly gain in a row.
• Investors keep their bullish view on the so-called ‘Trump trade’.
• The US Dollar Index hit two-year peaks past the 108.00 mark.

Amidst a remarkable streak of success, the US Dollar (USD) has surged to levels not witnessed in over two years, surpassing the 108.00 milestone when tracked by the US Dollar Index (DXY).

This week marks the eighth consecutive week of gains for the index, a momentum that has remained unbroken since late September.

Uncertainty around the Trump administration: A double-edged sword?

While awaiting significant announcements from President-elect Donald Trump, investors seem to have embraced the current stability, minimizing the likelihood of unexpected developments in key appointments.

Market sentiment across various sectors, including crypto, equities, and the corporate landscape, remains dynamic. The optimism surrounding Trump’s potential second term is fueled by expectations of corporate tax cuts and deregulation, leading to robust gains in financials, energy, and industrials.

Trump’s proposed fiscal policy changes, combined with potential tariffs on European and Chinese imports, could reignite inflationary pressures, impacting the Federal Reserve’s monetary policy decisions.

The Fed’s response to such external factors may include pausing or halting the current easing cycle, maintaining rates at a restrictive level, which could strengthen the US Dollar but potentially slow down economic activity.

With the year-end approaching, the anticipation of Trump’s policies and the possibility of a “Santa Rally” suggest a positive outlook for the US Dollar’s strength.

Cautious Fed, confident Dollar

The Dollar’s rally is further supported by the cautious approach of the Federal Reserve, as highlighted in Chair Jerome Powell’s recent statements emphasizing no rush to lower interest rates.

High US inflation figures and a focus on the labor market’s gradual cooling pace are key considerations for the Fed’s policy decisions. The overall health of the US economy plays a pivotal role in shaping future monetary policies.

Strong GDP figures and a resilient labor market indicate the US economy’s outperformance compared to its G10 counterparts, potentially bolstering the US Dollar in the medium to long term.

Rate changes across the globe: Who’s hiking, who’s cutting

Various global economies, including the Eurozone, Japan, Switzerland, the UK, and Australia, are facing deflationary pressures and economic uncertainties.

Central banks in these regions have taken different approaches to address economic challenges, with decisions ranging from rate cuts to maintaining cautious stances.

While the European Central Bank, Bank of England, and Swiss National Bank have adjusted interest rates, the Reserve Bank of Australia and Bank of Japan have maintained their accommodative policies for the time being.

What’s up next week?

Next week’s key event will be the release of the FOMC Minutes from the November 7 meeting, offering insights into the Fed’s monetary policy decisions and their impact on the real economy.

Techs on the US Dollar Index

The US Dollar Index (DXY) continues its upward trajectory, aiming for recent cycle highs and potential targets in the coming weeks. Technical indicators suggest both short-term corrections and long-term uptrends.

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