The U.S. Dollar Index (DXY) dipped by 0.14% to
109.50 points this week, while the EURUSD edged up by 0.10% to 1.02550. Though
the decline of the Greenback may appear minor, it is notable in the context of
the current environment, where expectations of further Dollar strength have
become highly pronounced. Speculation about the Dollar surpassing the Euro has
been widespread, with the options market projecting GBPUSD to trade in the
1.11000-1.12000 range amid financial challenges facing the U.K. government. Meanwhile,
the People’s Bank of China (PBOC) is signaling potential Yuan devaluation in
response to anticipated U.S. tariff increases.
The Dollar’s rising momentum became the
dominant narrative over the weekend, making Dollar-denominated assets a staple
in portfolios. The EURUSD dropped to 1.01771 on Monday as the Greenback
strengthened, but this rally lost steam after speculation emerged about the new
U.S. administration considering a gradual increase in tariffs instead of an
abrupt hike. This prompted the EURUSD to rebound to 1.02774, suggesting
potential for further upside correction. Additionally, the PBOC’s intensified
efforts to support the Yuan could influence broader currency trends, as the
central bank has a history of successfully reversing market trends.
Attention is now focused on upcoming U.S.
inflation data. Expectations point to an increase in December, with consumer
prices potentially rising to 2.9% YoY from 2.7%. This could delay Federal
Reserve (Fed) rate cuts, providing additional support for the Dollar. However,
speculation that President-elect Donald Trump may exert pressure on the Fed to
moderate its hawkish tone introduces uncertainty to the Dollar’s trajectory. If
this speculation proves accurate, the Dollar’s continued strengthening may not
be guaranteed.
Large investors have placed significant bets
on a rising Dollar over the past two weeks. Still, the sustainability of these
positions is uncertain, as similar patterns in other asset classes over the New
Year period have seen prices return to baseline after brief spikes.
From a technical perspective, the EURUSD has
support at 1.01500-1.01700 and resistance at 1.02800-1.03000. A breakout above
resistance could see the pair climb to 1.04700-1.05700, with potential to
extend gains towards 1.09500-1.10500. Conversely, a drop below support would
reaffirm Dollar strength and open the door for further declines.
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