The US Dollar Index (DXY), which tracks the value of the US Dollar (USD) against six major currencies, is holding steady near 108.50, its highest level since November 2022. This follows the Federal Reserve’s (Fed) recent hawkish move, cutting interest rates by 25 basis points (bps) on Wednesday, while signaling a cautious approach toward further cuts in the coming years.
Fed’s Hawkish Rate Cut and Its Impact on the USD
The Fed’s decision to cut rates by 25 bps to 4.25%-4.50% — a two-year low — has strengthened the USD, bolstered by the central bank’s cautious stance on future rate reductions. Fed Chair Jerome Powell noted that while inflation remains persistently above the Fed’s 2% target, the central bank is hesitant to proceed with further rate cuts at a rapid pace. This dovish tone has driven US Treasury yields higher, with the 2-year and 10-year bond yields reaching 4.30% and 4.56%, respectively, helping to underpin the dollar.
The Fed’s Summary of Economic Projections (SEP), also known as the “dot plot,” forecasted only two rate cuts in 2025, down from four previously projected. This more conservative approach to rate easing has kept the USD on a strong upward trajectory, further solidifying its position in the forex market.
US Economic Data Drives USD Strength
In addition to the Fed’s monetary policy shift, the US economic data has been robust, adding to the strength of the USD. The US Gross Domestic Product (GDP) Annualized for the third quarter showed a growth rate of 3.1%, exceeding both market expectations and the previous reading of 2.8%. This solid economic performance signals resilience in the US economy, supporting expectations for a stable dollar.
Moreover, the US labor market data was also positive. Initial Jobless Claims dropped to 220,000 for the week ending December 13, down from 242,000 in the prior week and lower than the expected 230,000. This indicates ongoing strength in the labor market, further boosting confidence in the USD.
Focus on Upcoming US Economic Data
As traders look ahead, key economic reports from the United States will be in focus. The US Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, is scheduled for release on Friday. PCE data will provide crucial insights into inflationary pressures, which could influence expectations around future Fed policy decisions.
Additionally, the Michigan Consumer Sentiment Index is set to be released, offering a snapshot of consumer confidence. The outcome of these data releases could further impact the USD and provide additional direction for the US Dollar Index (DXY).
Technical Outlook for the US Dollar Index (DXY)
From a technical standpoint, the DXY is maintaining its bullish momentum, holding firmly above the 108.00 level. The recent highs near 108.50 are a key resistance level, and a break above this could push the index towards the next resistance around 109.00. On the downside, support is expected near the 107.00 level.
Related Topics:
