US Dollar Forecast: DXY Jumps Intraday as Jobless Claims Support Fed Hold

U.S. Dollar Posts Largest Yearly Drop Since 2017 Despite Late-Week Bounce

The U.S. Dollar finished slightly higher against a basket of major currencies on Wednesday but still ended the year in a weak position, posting its largest yearly drop since 2017. The greenback reversed early losses after the Labor Department reported that weekly initial claims dropped by 16,000 to a seasonally adjusted 199,000, the lowest in a month, and well below the Reuters estimate of 220,000.

On Wednesday, DXY settled at 98.280, up 0.063 or +0.06%.

Strong Jobs Data Sparks Short-Covering Rally

Despite the favorable response by the dollar, some analysts downplayed the report, citing noisy holiday markets that can skew the data. Nonetheless, it was a good number that spoke well of the U.S. labor market.

The labor market data was bad news for the bears betting on a dovish Fed in 2026. It helped fuel the intraday short-covering rally that pushed the index to a weekly high on the thought the Fed could hold for longer on a rate cut than originally thought.

Fed Minutes Reveal Deep Division on Rate Path

Late Tuesday the minutes from the Fed’s December 9-10 meeting showed members agreed to reduce rates only after a challenging debate about the risks facing the U.S. economy right now. They include a weakening labor market and sticky inflation.

Although the longer-term forecasts call for a weaker dollar in 2026, the head-butting between those who support the Fed’s projection of only one rate cut next year and those who expect two or more rate cuts could be the source of volatility at the start of the new year.

In my opinion, there is enough doubt regarding the timing of the Fed’s rate decision to put a bid under the market and hold it inside a trading range for the first few months in 2026.

Technical Setup Points to Range-Bound Trade Early in 2026

Technically, the market is currently sitting at precisely the 50% level of the September 17 main bottom at 96.218 and the November 15 main top at 100.395. The halfway point of this wide range is 98.28 and the Fibonacci retracement level of this range is 97.814.

This retracement zone is the sweet spot for traders because with it, we can determine strength and weakness, in my opinion. Based on the current setup, a sustained move over the 50% level at 98.28 will signal the presence of buyers. This could fuel a near-term rally; however, it will still face headwinds at 98.749, 99.072 and the 200-day moving average at 99.015 and the 50-day moving average at 99.107.

On the flipside, a sustained move under 97.814 will be a sign of weakness with potential downside targets at 97.749, 97.462 and 97.199. The latter is the potential trigger point for an acceleration into the September 17 main bottom at 96.218.

More Information in our Economic Calendar.