US dollar index technical analysis and outlook for early 2025
The US dollar has witnessed an impressive 7% rally since October 2024, primarily driven by expectations surrounding Trump’s economic policies and their potential impact on the Federal Reserve’s (Fed) monetary stance.
While the forex market continues to price in a December rate cut, Fed Chair Jerome Powell’s recent less dovish rhetoric, suggesting the economy shows no urgency for lower rates, may well support further dollar strength into early 2025.
The greenback’s advance has been underpinned by robust US services data, resilient retail sales figures, and an uptick in core inflation for the first time since April 2023, putting previous rate cut expectations into question.
A likely 25 basis point cut in December may be followed by a more data-dependent approach in 2025, potentially supporting continued dollar strength.
Trump’s tariff threats and interest rate differentials
President-elect Trump’s recent signals point towards imminent trade restrictions, though US policymakers currently view any inflationary impact as transitory.
The economic impact may prove more severe for export-dependent regions in Europe and Asia, potentially forcing more aggressive monetary easing in these areas compared to the US.
Recent disappointing eurozone purchasing managers index (PMI) data has markets anticipating a possible 50 basis point cut in January 2025, which could widen interest rate differentials further.
This divergence in monetary policy paths may continue to fuel demand for the US dollar.
Safe-haven status amid global uncertainties
Historical data shows the dollar typically strengthens during periods of heightened geopolitical tension, as evidenced during the 2018 US-China trade tensions.
While markets appear better prepared for potential trade restrictions this time, tit-for-tat retaliation could still trigger unexpected volatility.
The forex landscape in 2025 may be dominated by ongoing geopolitical uncertainties and the delicate balance between growth and inflation.
Such uncertainty typically benefits the US dollar’s safe-haven status. Then again de-escalation in the Middle East, both President Biden and President-elect Trump’s aim, could lead to softening in the greenback. This was the case over the past few days when the US Dollar Index slipped from its November 2-year high at 108.07 to this week’s 105.60 low, the first negative week this month.
Technical analysis suggests possible near-term correction
The Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report reveals US dollar positioning versus G10 currencies at its highest since July 2024, suggesting a possible near-term consolidation.
In addition, the daily relative strength index (RSI) shows a minor bearish divergence between the October and November highs, potentially signalling easing upward momentum. Having said that, this week’s retracement lower found support along the accelerated October-to-November uptrend line at 105.60.
