US Dollar: Trump's Tariff Talk, Fed to Keep Greenback on a Tightrope This Week

• The US dollar's fate hinges on key central bank decisions and Trump’s trade rhetoric this week.
• Fed and ECB moves, combined with trade tensions, will likely determine the dollar's next direction.
• Strong US data could delay Fed cuts, while Trump’s tariff threats keep the dollar on shaky ground.
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The US dollar kicked off the week positively, bouncing back from last week's drop. As the dollar strengthens, all eyes are on this week’s pivotal events: the interest rate decisions from both the Fed and the European Central Bank (ECB), alongside US President Donald Trump’s ongoing trade rhetoric and policies, which remain key to shaping the dollar's trajectory.

Fed's Rate Decision and Guidance

The Fed is expected to hold rates steady at 4.5% during Wednesday's meeting. While no immediate changes are expected, markets are closely watching the Fed's statements, particularly those from Chairman Jerome Powell. The central bank’s data-dependent approach on inflation and economic uncertainty may not spur significant volatility, yet Trump’s vocal push for lower interest rates continues to stoke concerns about the Fed’s independence. This dynamic could lead to heightened volatility for the dollar in the near future.

Trump's Trade Policies and Tariff Threats

Trump's recent trade tensions with Colombia have already caused fluctuations in the dollar. His threats of tariffs, following Colombia's refusal to accept US military aircraft, added short-term market uncertainty before he stepped back from the threat. While Colombia is a small player in global trade, these actions provide a glimpse into how Trump may approach trade relations with larger economies. His broader tariff threats against China, Canada, Mexico, and the Eurozone have the potential to ignite a new wave of inflation in global trade, pushing up US bond yields and strengthening the dollar while suppressing global risk appetite. February’s expected tariff announcements will be a key focus, with the potential to drive significant short-term movements in the dollar.

Data from the US Economy

US manufacturing PMI data released last week surpassed expectations, signaling modest growth in the sector. Additionally, December’s second-hand house sales hit a 10-month high, reinforcing the economy’s resilience. However, a dip in US business activity to a 9-month low in January, combined with rising price pressures, suggests the Fed may soon reconsider its stance on interest rates. If inflation nears the Fed’s 2% target, a potential dollar depreciation could be on the horizon.

ECB Interest Rate Decision and European Developments

The ECB is likely to cut rates by 25 basis points to 3.75% on Thursday, which could weigh on the euro and indirectly boost the dollar. But the real impact will come from the ECB’s guidance in its decision text. Europe’s ongoing economic struggles, energy crisis, and political uncertainties create challenges for the ECB and complicate the euro’s outlook, especially as Trump’s tariff threats continue to hang over Europe. The EUR/USD pair will be one to watch for any signs of continued dollar strength.

Technical Outlook for DXY

Since October, the DXY has been on an upward trajectory, reaching as high as 110. However, a shift occurred after Trump’s softened stance on tariffs in mid-January, pushing the DXY lower and breaking the bullish channel. As of this week, the dollar is testing the Fib 0.236 support at 107.8. Should the DXY fail to push past the 108.7 resistance, a decline toward the Fib 0.382 level at 106.35 is likely.

DXY Price Chart

On the flip side, if the dollar maintains above 107.8, it could pave the way for a potential rebound, with 108.7 as the next key resistance before targeting a move toward 111. Any sharp sell-off could bring the 106.35 support into play, and breaking this level could trigger a more significant pullback toward the 103-105 range.

Conclusion

The dollar is caught between the Fed and ECB's decisions, Trump’s trade policies, and a volatile global landscape. A steady Fed and ECB rate cut could support the dollar's strength, but Trump’s trade stance and uncertainty around global tariffs are likely to drive market volatility. Strong US economic data could delay Fed rate cuts, pushing the dollar higher, while Trump's rhetoric may continue to shape the dollar's path. As a result, traders will closely monitor the upcoming FOMC decisions and Trump’s statements for clues on the dollar’s next move.

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