The Dollar Is Looking to the Upside Ahead of the Fed

The U.S. Dollar index is trading neutrally around 107.00 points this week, with EURUSD down by 0.68% to 1.04800. The major currency pair failed to hold above the resistance at 1.05400-1.05600, despite several attempts at the start of the previous week. However, the Dollar resumed its climb following the release of higher-than-expected U.S. inflation data for November.

Consumer prices rose to 2.7% YoY in November, up from 2.6%, while core CPI, excluding food and energy, remained steady at 3.3% YoY. The EURUSD closed last Wednesday within the resistance zone at 1.05400-1.05600, before unexpectedly retreating after producer prices accelerated to 3.0% YoY from 2.6%. This pushed the pair down to the support level at 1.04400-1.04600, followed by a slight recovery to 1.04950 by the end of the week. Investors have largely brushed aside inflation concerns, though rising consumer prices have brought unusual focus to egg prices as a contributing factor. While this may seem comical, there are more significant trends driving the inflation data.

Meanwhile, large investors have once again positioned themselves against the Dollar. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net outflows of $19.7 million last week, the largest since mid-October. This situation echoes previous events when investors opened short positions on the Dollar around 1.08000-1.09000, only to see their bets neutralised when Donald Trump won the presidential election. This time, large investors are making a second attempt to capitalise on Dollar weakness, showing confidence despite rising inflation. They appear to be targeting a 4.0-5.0% upward move, with EURUSD potentially rising to 1.09000-1.10000.

This sets the stage for a key development ahead of the Federal Reserve (Fed) meeting on Wednesday. Investors anticipate a hawkish response from policymakers, with expectations that the Fed may signal a quarter-point interest rate cut alongside updated dot plot projections, showing only two rate cuts in 2025 instead of the four forecasted in September. Fed Chair Jerome Powell is likely to emphasise the strength of the labour market and persistent inflationary pressures in this scenario.

While this backdrop is not inherently supportive for EURUSD gains, large investors tend to make well-timed bets, suggesting the Fed might ultimately be less hawkish than feared. Nevertheless, for EURUSD to establish any bullish momentum, the pair must first break above the 1.05500-1.05700 resistance zone.