Dollar rebounds against major currencies, halting downtrend.
November: Dollar’s largest monthly drop amid cooling inflation.
Mixed short-term forecast amidst global economic uncertainties.
Short-Covering Underpins the Greenback
On Monday, the U.S. dollar has started to regain ground against a group of major currencies, attempting to reverse its three-week downtrend. This recent decline in the dollar’s value is largely due to expectations that the Federal Reserve may soon cut interest rates. Today’s slight rally in the dollar’s value is primarily driven by traders adjusting their positions before the release of the U.S. Non-Farm Payrolls report on Friday, combined with some profit-taking.
This movement appears to be more about traders covering their short positions rather than initiating new purchases of the dollar.
In terms of specific movements, the dollar index, which compares the dollar to six major currencies, has seen a slight increase of 0.1% to 103.38, while the euro has dropped by nearly 0.2%, trading at $1.0863.
Recent Trends and Factors
November was a challenging month for the dollar, marked by a 3.1% drop in the dollar index – its most significant monthly decline in a year. This was influenced by data indicating a rapid cooling of U.S. inflation and expectations of a more lenient Fed policy. The euro capitalized on this, climbing 3% against the dollar, reaching over $1.10 – its highest since August. Conversely, the British pound and the yen experienced slight movements against the dollar.
Fed’s Stance and Global Outlook
Federal Reserve Chair Jerome Powell recently asserted the Fed’s readiness to further tighten policies if necessary. However, he also noted that current interest rates are significantly curbing inflation. For a consistent decline in the dollar, conditions would require not just the anticipation of Fed rate cuts but also robust growth outside the U.S., which currently seems improbable.
Influential Data and Events Ahead
Investors are now eagerly awaiting the November U.S. jobs report, expected to reveal an increase in job additions from October. Additionally, the unexpected drop in German exports in October has raised concerns about the stability of Europe’s largest economy. Upcoming speeches from several European Central Bank officials, including President Christine Lagarde, are also likely to impact currency markets.
In the short term, the outlook appears mixed. While recent trends suggest a bearish view due to the anticipation of Fed policy changes, the lack of strong global growth and upcoming economic data might contribute to periods of strength in the dollar amidst a broader downtrend.
Daily US Dollar Index (DXY)
The US Dollar Index (DXY) currently trades at 103.442, marginally above its previous close of 103.193. This slight uptick indicates a potential for upward momentum.
However, the index is below both its 50-day (105.406) and 200-day (103.574) moving averages, suggesting a bearish sentiment in the medium to long-term. The proximity to the 200-day moving average is particularly noteworthy, as it hovers just above the main support level of 101.950, which could act as a crucial threshold for further bearish trends.
With the current price slightly below the minor resistance of 103.572, there’s a tension between immediate upward potential and longer-term bearish pressures. This positioning hints at a cautious market sentiment, with a tilt towards bearishness, pending further price actions around these key technical levels.
James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.