US Dollar weakens sharply as Powell turns dovish

• The US Dollar continues in the red after Wednesday’s sell-off. 
• Traders brace for three major central bank decisions in one day.
• The US Dollar Index trades near November’s low around 102.50.

The US Dollar (USD) underwent a very harsh correction on Wednesday during the speech from US Federal Reserve (Fed) Chairman Jerome Powell. Markets disregarded all the remarks on the possibility of more hikes when needed and the freedom the Fed gives itself to react any way it sees fit to get inflation down to 2%. All that mattered was that the dot plot projections showed a consensus of interest-rate cuts in 2024.

On the economic front, a chunky batch of data for the US is ahead, with Import and Export Prices, Jobless Claims and Retail Sales. Adding to that, no less than three major G7 central banks decide on interest rates. Expect very whipsaw moves and a spike in volatility ahead, with the possibility that US Dollar losses get easily retraced. 

Daily digest: BoE, ECB could follow Fed path 

• A very big batch of US economic data is set to be released at 13:30 GMT:
  • The monthly Import Price Index is expected to remain unchanged at -0.8% in November. The yearly Import Price Index fell 2% in October.
  • The monthly Export Price Index is expected to decline 1.1%. On year, the Export Price Index declined 4.9%.
  • Initial Jobless Claims are expected to stay stable at 220,000. Continuing Jobless Claims are expected to pick up a notch, from 1.861 million to 1.887 million. 
  • Retail Sales for November are expected to fall 0.1% on month.  Retail Sales excluding autos are expected to shrink by 0.1%. The revision of the previous number can also be the  market-moving factor.
• A big slew of Central Banks are taking the stage as well:
  • The Swiss Central Bank (SNB) kept its rate unchanged at 1.75%.
  • The Norwegian Central Bank (Norges Bank) hiked 25 basis points, from 4.25% to 4.50%. This triggered a substantial appreciation for the Norwegian Krone against the Greenback of 2.5% (USD/NOK) at time of writing.
  • The Bank of England kept its benchmark rate unchanged at 5.25%. The vote split was 6 in favor of a hold and 3 members voting for a 25 basis point hike. Pound Sterling rallies 1% against the Greenback at time of writing.
  • At 13:15 GMT, the European Central Bank (ECB) is set to issue its rate decision. Expectations are for an unchanged deposit rate at 4%. ECB’s President Christine Lagarde will speak at 13:45 GMT. Expectations for the ECB will turn dovish and prepare markets for rate cuts in 2024. 
• Risk-on sentiment across the equities board. The Chinese Hang Seng Index is up 1% at its closing bell. European equities are jumping higher, with the German Dax up over 1%. US equity futures follow suit ahead of the US trading session with near 0.50% gains. 
• The CME Group’s FedWatch Tool shows that markets are pricing in a 79.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 20.7% expect the first cut already to take place.
• The benchmark 10-year US Treasury Note trades near 3.95%, a substantial leg lower as markets fully price in several cuts for 2024.

US Dollar Index technical analysis: Fed goes first, the rest will catch up

The US Dollar has had a firm bill to pay on Wednesday evening in the aftermath of the last Fed rate decision for 2023. The dot plot showed cuts for 2024, though that should not be anything new for traders as the Fed futures already pointed to cuts for 2024 back in the summer. With several other central banks ready to issue their dovish announcements and rate cut predictions for 2024, it is just a matter of time before markets adjust their bets favouring the US Dollar. In the rate differential, the US Dollar is still a strong yielder, and the Greenback could see ample investor inflow again, making the US Dollar Index (DXY) jump higher again. 

The DXY US Dollar Index could still resurge to more average levels seen recently. First level to recover is 103.00 as a big figure. Next up, 103.52  – near the 200-day Simple Moving Average (SMA) – is the ideal candidate to head next. From there, 104.00 and 104.60 (100-day SMA) are the levels to watch.

To the downside, the field is open for more downturn. The only level standing in the way for the DXY to head to 101.00 is the low of November near 102.46. Once broken, a big area opens up towards 101.00, with 102.00 briefly holding for support.