US Dollar Forecast: Bullish on DXY and Bearish on EUR/USD as Fed Rate Bets Shift

Is the U.S. Dollar Index Set to Break Higher?

The U.S. Dollar Index (DXY) rose on Monday, trading at 105.682, up 0.59%, after breaching last week’s high. This gain places the index close to its July peak at 106.130, with minimal technical resistance in sight. On the downside, minor support lies at 104.799, followed by the 200-day moving average at 103.858 and a key support level at 103.373. Last week, the DXY advanced over 1.5%, partly driven by market reactions to the U.S. presidential election results.

Could Fed Policy Expectations Drive Further Gains?

Traders are closely watching the Federal Reserve’s rate policy outlook as central banks worldwide ease monetary policy. A critical update will arrive on Thursday with the U.S. Consumer Price Index (CPI) report; a core reading above 0.3% could reduce the likelihood of a December Fed rate cut. JPMorgan recently raised its terminal rate forecast from 3% to 3.5%, predicting a steady pace of 25 basis point cuts beginning in December. Citi, however, anticipates U.S. rates to remain steady in the near term as markets balance immediate easing trends with potential policy shifts in 2025.

Will Trade Tensions Weigh on the Euro’s Performance?

The dollar’s strength has pressured the euro, pushing it to a 4-1/2-month low of $1.0679. Investor concerns are intensifying around potential U.S. tariffs on the eurozone, which could impact economic growth in the region. On Friday, reports emerged that President-elect Donald Trump might tap trade hawk Robert Lighthizer to head U.S. trade policy, sparking worries over more aggressive tariff actions. The euro’s sensitivity to these potential trade measures underscores its current vulnerability against the strengthening dollar.

Is Market Sentiment Boosting the Dollar’s Outlook?

Investor sentiment is increasingly influenced by Trump’s anticipated fiscal policies, which may boost inflation and bond yields while restricting the Fed’s flexibility on rate cuts. ING’s forex head, Chris Turner, suggests that Trump’s election could strengthen U.S. consumer and business confidence, even as it dampens sentiment abroad. This optimism has kept the dollar near its post-election highs against major currencies.

Market Forecast: Will the Dollar’s Rally Continue?

With minimal resistance and supportive economic indicators, the U.S. Dollar Index is positioned for potential gains, with a bullish outlook as it nears the 106.130 level. However, the upcoming U.S. inflation data and Fed policy remarks could play pivotal roles in either extending or capping this momentum. Traders should prepare for volatility as economic reports and trade policy developments emerge in the coming weeks.