DXY Outlook: Bullish Momentum Set to Continue on U.S. Inflation and Trump’s Agenda

Can Trump’s Policies Sustain Dollar Strength?

Donald Trump’s presidential victory has energized dollar bulls, as markets anticipate a mix of pro-growth policies, including potential tax cuts and new tariffs on imports. These measures, expected to drive inflation, are reinforcing the outlook for a Federal Reserve rate adjustment in December.

Fed rate cut expectations have recently cooled, with a 60% probability of a quarter-point cut now priced in, down from 84% last month, according to CME’s FedWatch Tool. Republican control of Congress further enhances the likelihood of Trump’s economic agenda taking shape, supporting the dollar’s bullish trend.

Barclays’ head of FX strategy, Mitul Kotecha, noted that the policy mix of fiscal stimulus, deregulation, and trade adjustments will likely add strength to the dollar as economic indicators remain robust. Analysts see scope for additional dollar gains as traders position for growth-driven inflation.

Will Inflation Data Keep the Fed on Course?

The October Consumer Price Index (CPI) came in as expected, rising 0.2% for the month and 2.6% annually. Core CPI, which excludes food and energy, increased by 3.3% year-over-year, reinforcing market expectations for a Fed rate cut in December. Bond yields reacted in kind, with the 10-year Treasury yield slipping 5 basis points to 4.38%, and the 2-year yield down 9 basis points to 4.256%. Analysts believe the inflation data may give the Fed enough assurance to proceed with its expected December rate adjustment, as it aligns with broader policy expectations under Trump’s platform.

How Are Policy Divergences Affecting the Yen and Euro?

The Japanese yen tumbled past 155 per dollar, its lowest level since July, as Japan grapples with its own inflation concerns. Rising wholesale inflation pressures complicate the Bank of Japan’s stance on rates, heightening the policy gap with the U.S.

The euro also struggled, touching near a one-year low of $1.0594, weighed by political uncertainty following the collapse of Chancellor Olaf Scholz’s coalition and looming snap elections in Germany. Concerns of potential Trump tariffs on European and Chinese imports further add to euro pressures.

Is the Dollar’s Bullish Momentum Set to Continue?

With inflation data aligning with expectations and Trump’s pro-growth policies on the horizon, the dollar’s upward momentum appears poised to continue. Traders will be closely monitoring the Producer Price Index on Thursday and retail sales data on Friday for additional confirmation of U.S. economic resilience. If upcoming reports reinforce these trends, the dollar could extend gains, maintaining a bullish trajectory through the end of the year as the Fed and market participants adjust to evolving fiscal and monetary landscapes.