- The US Dollar edges higher following stronger-than-expected US preliminary Services PMI data, signaling economic strength and boosting the Greenback.
- Traders are gearing up for the upcoming US Retail Sales data, with growing expectations that the Fed will slow or pause its interest-rate-cutting cycle in 2025.
- The US Dollar Index (DXY) is hovering around the 107.00 mark, attempting to climb higher.
The US Dollar (USD) is trading in positive territory against most major G20 currencies on Tuesday, with the DXY Index holding above the 107.00 level. The Greenback has regained investor confidence after the preliminary US Purchasing Managers Index (PMI) for December showed the economy expanded at the fastest pace in 33 months, driven by the services sector. Meanwhile, with the Federal Reserve expected to cut its policy rate by 25 basis points on Wednesday, the market is factoring in a small Goldilocks scenario for the week. However, growing expectations that the Fed will slow down its rate-cutting cycle in 2025 continue to support the USD.
In Europe, political instability is weighing on the Euro (EUR), as German Chancellor Olaf Scholz lost a vote of confidence on Monday, triggering snap elections for February 23. This, along with ongoing challenges in France, has led to a weaker Euro, which makes up 57.6% of the US Dollar Index (DXY).
The key event on Tuesday’s US economic calendar is the Retail Sales data. Given that November and December are seasonally sensitive months for retail due to holidays like Thanksgiving and Christmas, strong Retail Sales would signal healthy consumer spending and growing economic activity.
Daily Digest Market Movers: Focus on Retail Sales
- At 13:30 GMT, November Retail Sales data will be released:
- Monthly Retail Sales growth is expected to rise to 0.5%, up from 0.4%.
- Retail Sales excluding Cars and Transportation is forecast to increase to 0.4%, up from 0.1% last month.
Revisions to previous month's data may have a greater market impact than the actual reading.
- At 14:15 GMT, Industrial Production for November is due, with expectations for a 0.3% growth, reversing the previous 0.3% contraction.
- The National Association of Home Builders (NAHB) will release its Housing Market Index for December at 15:00 GMT, with a slight increase expected to 47, up from 46 last month.
- Equities are off to a weak start on Tuesday, with Asian and European indices under pressure. US futures are also showing signs of fatigue, down by less than 0.50%.
- The CME FedWatch Tool is pricing in a 95.4% probability of a 25 basis point rate cut by the Fed at Wednesday’s meeting. The US 10-year benchmark rate has risen to 4.42%, a fresh three-week high.
US Dollar Index Technical Analysis: Yields Driving the Move
The US Dollar Index (DXY) is edging back towards the 107.00 level, while the bond market experiences turbulence with a surge in yields as investors sell U.S. bonds. Despite the Federal Reserve set to cut rates by 25 basis points on Wednesday, markets are already factoring in the potential impacts of Donald Trump's policies, which may prompt the Fed to hold rates steady or even hike them to manage economic growth.
On the upside, 107.00 remains a crucial level that needs to be firmly reclaimed with a daily close above it before targeting 108.00. If this level is breached, the next key resistance is the two-year high of 108.07 from November 22.
To the downside, 106.52 is the first support level in case of profit-taking. Below that, the pivotal support at 105.53 (the April 11 high) comes into play, followed by the 104-region. If the DXY falls to 104.00, the 200-day Simple Moving Average at 104.19 should provide support, acting as a buffer against further declines.
