The dollar is declining at the start of the new week. US Treasury yields are also falling on Monday, adding further pressure on the dollar.
Last week was characterized by dollar strength amid rising inflation and ongoing uncertainty surrounding potential Federal Reserve decisions.
The recent nonfarm payrolls showed job growth of only 50,000 versus expectations of 66,000, while unemployment unexpectedly fell to 4.4%. Average hourly earnings rose faster than forecast, reaching 3.8% year-over-year. Despite signs of cooling in the labor market, analysts believe the situation is far from as dramatic as initially thought.
In addition, the preliminary University of Michigan Consumer Sentiment Index for January, also released on Friday, rose to 54.0 from 52.9 in December, exceeding the forecast of 53.5.
Overall, last week's data support a more optimistic economic outlook and reduce the need for emergency interest rate cuts.
As is known, in December the Fed cut its policy rate by 0.25%. However, the minutes of that meeting revealed serious disagreements among committee members regarding monetary policy.
Following the release of macroeconomic data, expectations regarding the next steps by US monetary authorities were revised.
Economists now expect the Fed to cut borrowing costs by 25 basis points in June and September, rather than in March and June as previously anticipated.
Meanwhile, the CME Group FedWatch tool currently indicates a 95% probability of a pause in January.
At the same time, particular attention is being paid to the criminal case against Fed Chair Jerome Powell related to the $2.5 billion renovation of the central bank's building. Powell himself has called the charges political manipulation aimed at undermining the regulator's independence and altering monetary policy. A possible change in Fed leadership could trigger a sharp decline in the dollar.
After testing the strong resistance level at 99.13 (EMA144 on the daily chart) on Friday, USDX futures declined today and at the start of the US trading session toward the support level at 98.72 (EMA50 on the daily chart). However, given that USDX futures are still maintaining upward momentum in the short term, a rebound from the 98.72–98.60 support zone (EMA200 on the 1-hour chart) and a resumption of the upward corrective move can be expected.
If this scenario plays out, a more successful retest and breakout of resistance at 99.13 could create the conditions for a move toward the key resistance level at 99.60 (EMA200 on the daily chart), which separates the medium-term bearish dollar market from a bullish one. A breakout of this level, followed by a breakout above 99.90 (EMA50 on the daily chart), would confirm the revival of a medium-term bullish USDX trend, with upside potential toward the upper boundary of the ascending channel on the weekly USDX chart, which also coincides with the key long-term resistance level at 101.45 (EMA144 on the weekly chart).
In a negative scenario for the dollar, a break below the 98.60 support level would fully return the price into bearish territory, opening the way for a decline toward the strategic support level at 96.80, which separates the global bullish USDX market from a bearish one.
Conclusion
Further developments in the dollar outlook in the near term will depend on inflation dynamics (CPI data are scheduled for release on Tuesday at 13:30 GMT, and producer inflation PPI on Wednesday) as well as statements by Federal Reserve officials, including today's speeches by Atlanta Fed President Raphael Bostic (17:30 GMT) and New York Fed President John Williams (23:00 GMT).
The market is awaiting clear signals from US monetary authorities to determine the next steps. Current market conditions remain uncertain, but the risks of a significant strengthening of the dollar persist, especially if inflation continues to rise.
We will continue to monitor developments closely and make well-balanced investment decisions.
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