US Dollar Forecast: Will Traders Defend 105.722 Amid Fed and Inflation Uncertainty?

Why Did the U.S. Dollar Index Drop Sharply This Week?

The U.S. Dollar Index (DXY) ended the week at 105.782, down 1.59%, its steepest weekly decline in four months. This retreat follows a recent surge to a two-year high of 108.071, as traders reassessed inflation risks and Federal Reserve policy expectations heading into December.

What Role Did Inflation Data Play?

The October Personal Consumption Expenditures (PCE) Price Index, a key inflation metric, rose more than expected, underscoring persistent price pressures above the Federal Reserve’s 2% target. This data temporarily supported the dollar but also dampened expectations for aggressive rate cuts in 2024. Current futures pricing reflects a 66% probability of a 25-basis-point cut in December, with waning expectations for further reductions in early 2024​​.

Could Technical Levels Signal a Trend Reversal?

The DXY tested critical support near 105.722 this week, marking a key pivot within its broader range of 103.373 to 108.071. A sustained breach below this level could open the door to further downside, with 104.114 as the next target. However, the index’s overall trend remains bullish, supported by long-term technical levels such as the 200-day moving average​​.

How Did Forex Markets React?

In the forex markets, the euro rebounded against the dollar, recovering from earlier losses on hawkish remarks by European Central Bank officials. ECB policymaker Isabel Schnabel emphasized the need for gradual rate cuts, contrasting dovish comments from other board members.

Meanwhile, the Japanese yen posted its strongest weekly rally in three months, surging 1.9% on speculation of a December rate hike by the Bank of Japan. This came after Tokyo inflation data surprised to the upside, reinforcing expectations of tighter Japanese monetary policy​​​.

Commodity-linked currencies like the Canadian dollar and Australian dollar showed mixed performances. The Canadian dollar weakened amid tariff concerns tied to U.S. trade policies, while the Australian dollar was steady following remarks from Reserve Bank of Australia Governor Michele Bullock, who signaled that rate cuts were unlikely in the near term.

What About Gold and Bitcoin?

Gold faced notable volatility, ending the week 2.43% lower. The precious metal recovered from sharper losses earlier in the week as both Treasury yields and the dollar eased from their highs. Investors unwound safe-haven positions amid shifting risk sentiment, although gold’s near-term direction remains closely tied to inflation data and Federal Reserve policy, which will heavily influence its December outlook.

Bitcoin slipped 1.43% for the week but staged a strong late-week recovery, capping a remarkable 40% gain in November as it neared its all-time highs. Optimism surrounding a potentially more favorable regulatory environment under the incoming U.S. administration fueled the cryptocurrency’s rally, alongside broader risk-on sentiment. Analysts anticipate Bitcoin’s upward momentum could persist, provided macroeconomic conditions and investor appetite for high-growth assets remain robust.

What Should Traders Watch Next?

The DXY’s next moves hinge on upcoming economic data, including U.S. employment figures and the November inflation report. A rebound above 107 would signal renewed bullish momentum, while a break below 105 could accelerate selling pressure toward the 104 level. Traders should also keep an eye on Federal Reserve commentary, which could clarify the pace of future rate adjustments. As year-end approaches, heightened volatility is likely to dominate market sentiment.

More Information in our Economic Calendar.