- All eyes are on this week's CPI report, which could reshape the dollar's trajectory.
- Geopolitical uncertainty and global central bank moves add to the greenback's challenges.
- Key technical levels signal potential volatility as the dollar index battles to hold support.
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The US dollar index struggled to maintain its momentum last week as markets digested mixed employment data and recalibrated expectations for the Federal Reserve’s upcoming rate decision.
With an 83% probability of a quarter-point rate cut priced in according to CME data, the focus now shifts to this week’s critical inflation report, which could upend current market dynamics.
If the CPI data surprises, the dollar’s rally, which began with Trump’s election victory, might face additional headwinds.
That rally already shows signs of fatigue, with year-end positioning dampening demand. Yet, geopolitical risks and policy uncertainty under the Trump administration continue to provide a floor for the index.
Morgan Stanley Joins the Bears on the Dollar
Morgan Stanley recently advised investors to short the dollar, citing the waning momentum of its prolonged rally.
While some analysts argue that geopolitical factors and Trump’s policies still support the greenback, the consensus is clear: the dollar’s dominant streak appears to be losing steam.
Economic Data Drives Market Sentiment
Despite ongoing geopolitical developments, including the situation in Syria, market attention remains fixed on US economic data.
Last week’s employment report, which showed a solid 227,000 jobs added but no change in the 4.2% unemployment rate, bolstered the case for a resilient US economy. However, it also reinforced the market’s expectations for a Fed rate cut.
The upcoming CPI report, scheduled for December 11, is now in the spotlight.
Core inflation is forecasted at 3.3%, while the headline CPI is expected to tick up to 2.7% year-over-year. Any deviation from these expectations could significantly sway the dollar.
Softer-than-expected data might amplify selling pressure, while a surprise to the upside could reignite dollar strength.
Global Central Banks Add to the Uncertainty
Across the globe, monetary policy decisions this week could also impact the dollar. The ECB is expected to cut rates further, adding pressure on the euro, while political uncertainty in France adds to the eurozone’s challenges.
In Asia, China’s economic policies and Japan’s tight market conditions continue to draw attention, though the yen has remained relatively stable.
Meanwhile, the Bank of Canada is likely to lower rates, and the Swiss National Bank is expected to aggressively cut rates to weaken the franc.
The Reserve Bank of Australia stands out as one of the few central banks expected to keep rates steady this month.
Key Technical Levels to Watch
The dollar index (DXY) has seen a notable pullback after peaking at 108 in late November. Currently, it holds support near 105.75, with 106.2 serving as a pivotal resistance level.
Sustained movement below 106.2 could accelerate the downtrend, potentially targeting the 104-105 range.
Conversely, a break above 106.2 would open the door to a retest of the 108 region, particularly if CPI data surprises to the upside or geopolitical tensions escalate.
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