US Dollar Forecast: Rallies as Fed Rate-Cut Odds Shift; Euro Parity Looms

U.S. Dollar Index Rallies as Fed Rate-Cut Odds Shift

The U.S. dollar index rebounded Wednesday, continuing its post-election rally after a brief pause, as investors analyzed Federal Reserve rate-cut expectations and President-elect Trump’s policy impacts. The dollar index has climbed 3% since the election, reflecting reduced confidence in aggressive Fed cuts. FedWatch shows a 59.1% probability of a December rate cut, down from 82.5% last week. Analysts cite global economic pressures and potential U.S. inflation as key drivers for a cautious rate path, aligning with Fed officials’ measured stance.

After firmly establishing support at 106.157 to 105.994, the U.S. Dollar Index (DXY) appears to have enough upside momentum to challenge 107.11 to 107.303.

Euro Slumps Toward Parity Amid Economic Concerns

The euro has nearly dropped to $1.05, a one-year low, raising the possibility of parity with the U.S. dollar. Factors include potential tariffs from President-elect Trump and a weak eurozone economy. While parity could worsen euro sentiment, boosting exports, it also raises import costs, impacting inflation modestly. Analysts are divided, with some predicting parity and others noting resilient eurozone growth. The ECB remains focused on overall trade-weighted performance, which shows the euro holding better than in past downturns.

The nearest support zone for the EUR/USD is 1.0542 – 1.0525. A successful test of this zone will push the single currency towards the next support at 1.0452 – 1.0437. Traders would have to overcome the 50-period moving average at 1.0593 to shift momentum to the upside.

Sterling Falls as Inflation Supports BoE Caution

The pound slipped 0.17% to $1.266 after initial gains driven by higher-than-expected UK inflation, which rose above the Bank of England’s 2% target. Accelerated price growth suggests the BoE may remain cautious about rate cuts. Markets now predict an 84.5% likelihood of the central bank holding rates steady at its next meeting.

GBP/USD continues its attempts to settle above the resistance level at 1.2675 – 1.2700. A move above the 1.2700 level will open the way to the test of the 50 MA at 1.2764. Another failed attempt to overcome resistance late in the session could lead investors to re-challenge the major support zone at 1.2590 to 1.2577.

USD/CAD Strengthens on Rising Global Risk Aversion

The Canadian dollar weakened against its U.S. counterpart on Wednesday, pulling back from an earlier one-week high, as the greenback notched broad-based gains and escalating Russia-Ukraine tensions led to investors turning more risk averse.

Technically, after a successful test of 1.3950 to 1.3930 support, traders are trying to overcome the 50-period moving average at 1.3992 for added momentum.

Dollar Strengthens Against Yen as Intervention Fears Loom

The dollar rose 0.36% to 155.2 against the yen, extending its recent gains to 9% since October. The yen’s weakness, reaching a three-month low, has raised speculation of possible intervention by Japanese authorities, as seen in July. Investors also anticipate a potential hawkish shift from the Bank of Japan, though recent remarks by BoJ Governor Kazuo Ueda provided no new policy direction. Markets are closely monitoring developments, including the announcement of Trump’s Treasury secretary pick.

The USD/JPY is edging higher after successfully navigating above the 50-period moving average at 154.712. However, its still faces headwinds at 155.024 to 155.530.

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