The US Dollar Index faces a setback after six weeks of gains
After a sustained rally, the US Dollar Index (DXY) hit a roadblock this week, putting an end to its six-week streak of advances. The index, which had climbed to new cycle highs above the 110.00 mark, saw a reversal in fortunes as US yields experienced a notable pullback across the board.
Factors influencing the Dollar’s performance
The decline in the Dollar was triggered by a series of events, including:
- Disappointing US inflation data for December
- Weaker than expected weekly labor market figures
- Lackluster Retail Sales data for December
These developments raised concerns among investors that the Federal Reserve (Fed) might only cut rates once this year, leading to a shift in market sentiment towards the Greenback.
Insights from Fed officials
Key statements from Fed officials shed light on the current economic outlook:
- Richmond Fed President Thomas Barkin noted a gradual uptick in inflation towards the Fed’s target
- New York Fed President John Williams emphasized the importance of data in shaping future policy decisions
- Fed Governor Chris Waller hinted at potential faster rate cuts based on easing inflation
- Chicago Fed President Austan Goolsbee expressed confidence in a stabilizing labor market
Despite these optimistic views, the market expects the Fed to keep rates unchanged at its upcoming January meeting, as indicated by the CME Group’s FedWatch Tool.
Trump’s impact on the Dollar
The “Trump trade” has been a significant driver behind the Dollar’s rally, with investors factoring in expectations related to Donald Trump’s economic policies:
- Focus on corporate deregulation and fiscal stimulus
- Emphasis on domestic manufacturing and tariffs on imports
- Strict enforcement on immigration policies
- Foreign policy priorities including reduced military involvement and a tough stance on China
Yields mirror the Dollar’s decline
The drop in the Greenback was mirrored by a decline in US Treasury yields across different maturities, reflecting the overall selling pressure on the Dollar in the market.
Upcoming events to watch
The upcoming Inauguration Day on January 20 and the release of advanced PMIs towards the end of the week are key events to monitor, especially during the Fed’s blackout period leading up to its January meeting.
Technical outlook on the US Dollar Index
Looking at the technical analysis, the DXY is poised to face key levels:
- Resistance at the 2022 peak of 114.77
- Support at the 2025 bottom of 107.75
- Interim support at the 55-day Simple Moving Average (SMA) of 107.02
- Further support at the December 2024 low of 105.42 and the critical 200-day SMA of 104.67
While the Dollar’s stance remains positive above the 200-day SMA, ongoing developments will be crucial in shaping its future trajectory.
DXY daily chart
Understanding the Federal Reserve (Fed)
For those new to finance, it’s essential to grasp the role of the Federal Reserve in shaping the US economy:
- The Fed aims to achieve price stability and full employment through monetary policy
- Interest rate adjustments are a key tool used by the Fed to manage inflation and employment levels
- Policy decisions are made at FOMC meetings, attended by a group of Fed officials
By understanding the Fed’s actions and their impact on the Dollar, investors can better navigate the financial landscape and make informed decisions.