As we move into the final trading session before Donald Trump’s inauguration, the US Dollar has begun to show signs of strength. However, uncertainty lingers in the markets following comments from Federal Reserve Governor Christopher Waller, who didn’t rule out the possibility of a rate cut in March. The US Dollar Index (DXY) managed to climb past the 109.00 mark, but its next move is still uncertain.
Friday saw the DXY, which measures the dollar’s strength against a basket of six major currencies, hang around the 109.00 level. Opinions are split among traders following an influential move earlier in the week, spurred by the December US Consumer Price Index (CPI). Waller’s remarks on Thursday further fueled uncertainty, suggesting that a March rate cut remains on the table. As the market braces for President-elect Donald Trump’s inauguration on Monday, traders are feeling rather directionless.
With a sparse US economic calendar to wrap up the week, focus is on some housing data from December. Ahead of Monday’s Martin Luther King Day, when US stock markets will be closed, expect traders to be cautious with their positions.
### Market Movers to Watch: Last-Minute Developments
Traders are feeling divided this Friday, reacting to Christopher Waller’s proposal for a March rate cut. Concurrently, the incoming Trump administration is ready to implement numerous executive orders once Trump is sworn in as the 47th President of the United States. These orders are expected to introduce fiscal measures, new tariffs, and stimulus packages, all of which could ramp up inflation.
At 1:30 PM GMT, data regarding US Building Permits and Housing Starts for December was released. Building Permits hit 1.483 million, surpassing the 1.460 million forecast, though slightly below the previous 1.493 million. Housing Starts climbed impressively to 1.499 million from November’s 1.289 million.
Later, at 2:15 PM GMT, US Industrial Production figures are anticipated to show a modest increase of 0.3% in December, following a slight dip of 0.1% in November.
Equities are looking positive on Friday, recovering from Thursday’s volatile performance. The primary US indices futures are trending upwards moving into the US opening bell.
The CME FedWatch Tool suggests a 97.3% likelihood that interest rates will remain unchanged in January. Many expect the Fed to stay flexible, closely monitoring data as Trump’s policies begin to take shape on Monday.
Meanwhile, the yield on the US 10-year Treasury is hovering around 4.568%, after dropping from Tuesday’s peak of 4.807%.
### US Dollar Index Technical Outlook: A Fresh Start Next Week
The US Dollar Index (DXY) is feeling the pressure, with Governor Waller’s commentary perhaps delivering a critical blow to the Greenback’s current trajectory. His unexpected call for a March rate cut caught traders off guard, shaking up market assumptions that were more aligned with data dependency. This surprise element could lead to significant mispositioning as Trump’s administration initiates its agenda.
Looking ahead, the key resistance to overcome remains the psychological level of 110.00. Breaking past that, the next target sits at 110.79, and further up would stretch to 113.91, the double peak from October 2022.
On the lower end, the DXY is testing a rising trend line from December 2023, which now acts as support around 108.95. If the index continues to slide, 107.35 acts as the next support line. Below this, a further level of support is anticipated at 106.52, with interim backing from the 55-day Simple Moving Average (SMA) sitting at 107.19.
As we monitor these movements, keep an eye on emerging policy decisions, and welcome the new administration, which is bound to affect the dynamics of the US dollar.
### Fed FAQs
The Federal Reserve (Fed) shapes US monetary policy, aiming for price stability and to promote full employment. Adjusting interest rates is the main method of achieving these goals. When inflation is above the 2% target, the Fed raises rates to cool things down, which typically strengthens the US Dollar. Conversely, if inflation falls below 2% or unemployment is high, the Fed may cut rates, weakening the dollar.
Eight times a year, the Federal Open Market Committee (FOMC) meets to evaluate economic conditions and decide on monetary policy. The meeting comprises twelve Fed officials, including the seven Board of Governors members, the New York Fed president, and four regional Reserve Bank presidents who rotate annually.
In drastic circumstances, the Fed may employ Quantitative Easing (QE), boosting credit flow in a sluggish financial system by purchasing high-grade bonds. This tends to weaken the US Dollar. Conversely, Quantitative Tightening (QT) is the scaling down of these purchases, often bolstering the dollar’s value.
