The US Dollar Index (DXY) is poised for its strongest weekly performance since July, propelled by a recent recalibration of expectations surrounding Federal Reserve rate cuts. This shift in sentiment, driven by robust economic data, has cast a shadow over the Japanese Yen and buoyed broader dollar strength.
Earlier projections of aggressive rate cuts by the Fed in 2024 have given way to a more cautious stance. Data highlighting labour market resilience, including Thursday’s ADP employment report, has tempered expectations for an early pivot towards easing. CME FedWatch tool now indicates a 65% chance of a March rate cut, down from nearly 90% a week ago.
Today’s non-farm payrolls report holds the key to the DXY’s immediate trajectory. Economists forecast 170,000 job additions in December, slightly lower than November’s figure. A stronger-than-expected reading could further bolster the dollar by reinforcing the Fed’s cautious stance on rate cuts.
The 4-hour chart shows that the DXY currently trades at 102.611, exhibiting strong upward momentum ahead of the NFP report. Price action sits comfortably above the 20-SMA (green line), 50-SMA (blue line), and 100-SMA (orange line), indicating a bullish bias. The RSI, currently at 70.91, suggests the DXY is approaching overbought territory. However, the recent bullish breakout above the SMAs and the uptrend remain valid for now.
Short-term trading opportunities could emerge towards the 102.984 resistance level if the bullish momentum persists. A break above this level could confirm further upside, potentially targeting 103.332. Conversely, a pullback in momentum could find initial support at 102.130. A breach below this level might bring the 101.757 support level into play.
The DXY is poised for a potentially strong weekly close, fuelled by a recalibration of Fed rate cut expectations and robust economic data. The upcoming non-farm payrolls report could serve as a key catalyst, with a stronger-than-expected reading potentially extending the dollar’s gains. From a technical standpoint, the DXY exhibits a bullish bias with a potential upside towards 102.984 and beyond. However, the overbought RSI suggests cautious optimism and the need for confirmation from today’s jobs data.
Sources: TradingView, Trading Economics, Reuters, Dow Jones Newswire.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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