- US dollar keeps gaining strength amid solid economic data and inflation concerns
- Right now, the market is eyeing key inflation reports this week to determine the Fed's next move.
- Meanwhile, the greenback is hitting new milestones against EM currencies, with the DXY eyeing 110.
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The U.S. dollar is poised to continue its upward momentum as the economy shows signs of strength heading further into 2025. Surprising employment data reinforces expectations that the Federal Reserve will keep interest rate cuts to a minimum, boosting the dollar's appeal against both developed and emerging market currencies.
However, the market's focus now shifts to inflation. Despite recent progress, inflation has yet to reach the Fed's 2% target. Investors will closely watch two major inflation reports this week: Tuesday's producer price index reading and Wednesday's followed consumer price index data.
Strong U.S. Economic Data Reinforces Dollar Strength
The latest nonfarm payrolls (NFP) report revealed a stronger-than-expected 256,000 jobs added in December, with unemployment dropping to 4.1%. While hourly earnings ticked lower, these results paint a picture of a resilient economy, suggesting that the Fed may steer clear of aggressive rate cuts. This outlook aligns with recent data showing inflation pressures lingering, further bolstering the Fed’s cautious stance.
Analysts have also warned that inflation risks are on the rise, supporting expectations of a more measured approach from the central bank.
Political Uncertainty Adds Fuel to the Dollar
As Donald Trump makes a potential return to the White House a real possibility, his policies—especially on trade and fiscal matters—are adding volatility to global markets. While his plans could further stoke inflation, they also reinforce the dollar’s role as a safe-haven asset, increasing demand for U.S. currency amid global uncertainty.
DXY Hits Key Milestones Against Global Currencies
The U.S. Dollar Index (DXY) surged last week, reaching 109.98, its highest level in months. The dollar has gained ground against the euro, pound, and Asian currencies. EUR/USD, for example, slid to 1.0275, marking its lowest point since November 2022, while the pound dropped to a 14-month low, driven by concerns over the UK’s economic outlook.
Goldman Sachs is bullish on the dollar’s performance against Asian currencies, raising its forecast for USD/JPY to 160 in three months, and 161 for the six-month outlook.
Inflation Data and Fed Policy: The Key to Dollar’s Next (LON:NXT) Move
This week’s inflation reports - Producer Price Index (PPI) on Tuesday and CPI on Wednesday - will be critical in shaping the dollar’s direction.
Analysts expect PPI to rise, while annual CPI is projected to climb to 2.9%. Strong inflation figures could reinforce expectations that the Fed will adopt a cautious stance on rate cuts, potentially boosting the dollar further.
Currently, market expectations suggest only one rate cut in the final quarter of 2025, signaling a more restrained approach from the Fed.
Key Levels to Watch for the Dollar
After testing the 108 support level at the start of the year, the DXY has continued its ascent, moving within a rising channel. This trend aligns with the Fibonacci extension from last year’s downtrend and could signal further upside.
The next key resistance for the DXY sits at 110.12 (Fibonacci 1.618). If the upward momentum continues, a move toward 110.65 is possible, testing the channel’s middle line once again.
If CPI exceeds expectations, the DXY could challenge the channel's upper boundary near 112. However, if inflation readings come in lower than expected, the dollar may struggle to break above 110, potentially retreating to the 109 level.
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