US Dollar Forecast: Bearish Momentum Builds as DXY Slips Under 50-Day MA, Euro Surges

U.S. Dollar Slips Below Key Moving Average, Pressure Mounts on Weak Outlook

The U.S. Dollar Index (DXY) is testing session lows, sliding below the 50-day moving average at 107.575. This technical level is seen as critical, with traders closely monitoring whether the breach will confirm a downtrend. Sustained pressure below this level could lead to deeper losses, with the next minor support at 106.698 and more substantial levels at 105.167 and the 200-day moving average at 104.729.

The primary driver behind today’s weakness is a combination of softer U.S. Treasury yields, a more conciliatory tone from former President Donald Trump on Chinese tariffs, and strengthening sentiment in Europe, which has underpinned rival currencies.

Trump’s Tariff Comments Weigh on Sentiment

In a Fox News interview Thursday, Trump signaled a less confrontational stance on China’s trade tariffs, stating he “would rather not” impose tariffs on Beijing. While the remarks provided a lift to risk sentiment, they pressured the dollar as traders speculated on reduced trade tensions. Peter Cardillo, chief market economist at Spartan Capital Securities, noted Trump’s “less hawkish” tone could represent a bargaining strategy but remains uncertain in its broader implications.

This dovish sentiment was reinforced by tepid moves in Treasury yields, with traders now looking ahead to next week’s Federal Open Market Committee (FOMC) meeting. While the Fed is expected to maintain rates, any commentary on inflation and wage pressures will likely shape market expectations.

Euro Zone Growth Surprises as Dollar Stumbles

The dollar’s decline was exacerbated by unexpected signs of growth in the euro zone, where the HCOB composite PMI rose to 50.2 in January, breaching the 50 mark that separates expansion from contraction. This recovery in business confidence, coupled with expectations of another European Central Bank (ECB) rate hike, pushed the euro above $1.05 for the first time since mid-December.

Adding to the euro’s momentum were improvements in European equity markets, optimism over natural gas supplies from the U.S., and a softer outlook on global trade tensions. Larry Fink, CEO of BlackRock, emphasized that pessimism around Europe has been overdone, suggesting opportunities for investment.

Market Forecast: Dollar Vulnerable to Further Losses

The technical and fundamental outlook for the U.S. Dollar remains bearish. Should the DXY fail to reclaim the 50-day moving average decisively, additional selling pressure is likely. A stronger euro and yen, supported by improving euro zone growth and a Bank of Japan rate hike, respectively, could continue to challenge dollar dominance.

Traders will be closely watching the PCE inflation report next week for any surprises, but near-term momentum points to the downside. Targets at 106.698 and below remain firmly in play if sentiment does not shift.

More Information in our Economic Calendar.