DX

The U.S. Dollar rally got held up at a roadblock near the key multi-month resistance. The common measure of the Greenback's strength against a basket of other major currencies was last seen above 107 in November 2022, and it came very close to passing the barrier this week. An intraday technical retracement below 106.50 was launched on Friday, November 15, due to a profit taking after climbing from under 103.50 since the beginning of the month. However, there are compelling fundamental reasons for keeping or even extending the upside pressure after a short interruption. A possible break through 1.0750 later may challenge the area between 110 and 112.

The impact of so-called Trump trades related to tariff fears outside the U.S. is an essential but not the only driver behind the gathering force of a Dollar "cyclone", as market traders also have to relive certain monetary considerations. The Federal Reserve chair Jerome Powell on Thursday night confirmed that the U.S. economy "is not sending any signals that we need to be in a hurry to lower rates". He rationalized that by saying that the strength the central bankers are currently seeing in the labour market gives the ability to approach their decisions more carefully, as the "battle against inflation" remains ongoing. And the latest set of raw data on the consumer price index (CPI) two days ago were exactly in favour of his assumptions, as the CPI rose to 2.6% YoY in October from 2.4% in September, even though it provided a highly expected 0.2% increase MoM in line with the previous month's moderate increase. The U.S. Dollar clearly accelerated its race against the European single currency and the British Pound, as well as the Japanese Yen and the Australian Dollar, immediately after the CPI release, as markets have found evidence for a deceleration in the pace of interest rate reductions.

Nearly 80% of futures traders on Chicago Mercantile Exchange (CME) now expect another 0.25% move down by the Federal Reserve in December and further 0.25% moves to ease the monetary policy in the beginning of 2025. Bets on a December rate cut to the 4.25%-4.50% range saw a substantial rise from the roughly 60% chance priced in before the consumer inflation data release. Broad expectations are that the Federal Reserve may stop or pause its rate cuts as soon as the policy range would be lowered to between 3.75% and 4%. More careful loosening of the interest rate noose helps the U.S. Dollar to strengthen, as most of the currency traders previously relied on a premature concept of faster rate cuts due to recession risks. Jerome Powell referred to the current monetary moves as only "an appropriate recalibration of our policy stance", being aware of the "risks of moving too fast or too slow" on rate cuts. "We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment," Powell argued.

In addition to touching 2-year highs for the U.S. Dollar index after Donald Trump's victory to carry on with potentially inflationary import tariffs, the Federal Reserve's response is another driver for the stronger Dollar to come. Meanwhile, the S&P 500 broad market barometer also retraced to 5,900 area after Jerome Powell's comments, though we see the impact on leading Wall Street stocks remains limited. This would barely impede the further development of the ongoing bullish rally on equities.