US Dollar sinks to mid-summer low as bulls unwind positions ahead of PCE inflation

• The US Dollar sees gains from last quarter fully eroded. 
• Equity markets jump higher as investors go all in on early Fed rate cuts. 
• The DXY US Dollar Index sinks below 102.00, and could go to 100.00 if PCE inflation misses estimates. 

The US Dollar (USD) is facing increasing selling pressure as investors are increasingly pricing in interest-rate cuts for early 2024. Markets are opting to ignore remarks and warnings from several US Federal Reserve officials, who are trying to play down expectations of upcoming cuts. While US equities are having a Christmas rally, US bond yields have plunged, leading the spread gap between the US Dollar and foreign currencies to shrink substantially. 

On the economic front, the very last big data dump for 2023 is set to take place. With the Personal Consumption Expenditure (PCE) Price Index numbers, markets will see the Fed’s preferred inflation gauge being released. Unless inflation comes in higher than expected, the US Dollar is likely to sink further ahead of Christmas. 

Daily digest Market Movers: Last data of 2023

• A very chunky batch of data will be released at 13:30 GMT:
  • Personal Consumption Expenditures (PCE) is due to be released:
    • Yearly Core PCE expected to fall from 3.5% to 3.3%.
    • Monthly Core PCE is to stay stable at 0.2%.
    • Yearly Headline PCE is to head lower from 3% to 2.8%.
    • Monthly Headline PCE is to remain unchanged, at 0%.
  • Durable Goods Orders for November are also to be released:
    • Durable Goods Orders are expected to rise 2.2% from a 5.4% decline a month earlier.
    • Durable Goods without transportation will head higher from 0% to 0.1%.
    • Personal Income will rise from 0.2% to 0.4%.
    • Personal Spending will tick up as well, from 0.2% to 0.3%.
• The Last numbers to be released will be the University of Michigan consumer sentiment and New Homes Sales, both at 15:00 GMT:
• The University of Michigan Consumer Sentiment Index is set to remain unchanged at 69.4 in December. Five-year inflation expectations are also seen unchanged at 2.8%.
• New Home Sales for November are expected to jump from 0.679 million to 0.685 million. 
• Equities are looking for direction, with minor gains as most takeaways. Asian markets closed near flat, except for the Hang Seng index, which closed down over 1.6% after the Chinese government released new measures to crack down on the gaming industry. 
• The CME Group’s FedWatch Tool shows that markets are pricing in an 83.5% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 14.5% expect the first cut already to take place.
• The benchmark 10-year US Treasury Note trades near 3.87%, the lowest level since summer.
•  

US Dollar Index Technical Analysis: Thrown out the window

The US Dollar Index is having one of its worst weeks in the last quarter. With trading desks cleaning up their balance sheets, it becomes clear that several US Dollar bulls have further unwounded their positions in the Greenback. With the relentless drop in US yields, the rate differential story has come to an end for 2023, with markets going all in on a further decline for early 2024.

Any upbeat surprise in data that could contradict rate cut bets or geopolitical events that trigger US Dollar inflow could still make the DXY head higher. On the daily chart, look for 103.00 as the first level to watch. Once trading above there, the 200-day Simple Moving Average (SMA) at 103.50 is the next important level to get to. 

To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is vital to hold and still see a close this evening above it. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.