US Dollar Gains Momentum as US Yields Recover, Offsetting 2% Yearly Loss

• The DXY surged to 101.30 after hitting a low near 101.20.
• December’s Chicago PMI was the main highlight of the session, but it fell below expectations.
• US Treasury yields made some gains but are still close to multi-month lows.
• The DXY is set to record a modest 2% annual loss, starting 2023 above 103.00 and closing just above 101.00.

The US Dollar (USD) is maintaining a muted tone on the final trading day of 2023. The US Dollar Index (DXY) is at 101.30, losing its daily gains as dovish bets on the Federal Reserve (Fed) continue to weigh on the Greenback. Disappointing Chicago PMI figures for December added to the currency’s pressure in a calm Friday session. 

The Federal Reserve’s dovish stance, which is open to cooling inflation figures, ruling out rate hikes in 2024, and predicting 75 bps of easing, has recently shifted demand away from the US Dollar to riskier assets. Currently, the market is expecting a rate cut in March with an additional adjustment in May. In the upcoming week, the US will release important labor market data, which will help investors make their predictions for the next Fed decisions.

Daily digest market movers: US Dollar trades soft as dovish bets and poor December Chicago PMI add pressure

• The Chicago PMI report, released by the Institute for Supply Management of Chicago for December, registered 46.9, falling below the consensus of 51 and the previous figure of 55.8.
• Next week, the key events on the US calendar will be December’s Nonfarm Payrolls, Average Hourly Earnings, and the Unemployment Rate.
• Yields on US bonds are struggling to advance, remaining close to multi-month lows. Specifically, the 2-year yield is recorded at 4.25%, while the 5-year and 10-year yields stand at 3.84% and 3.85%, respectively.
• The CME FedWatch Tool indicates a low probability of a rate hike in the January meeting, with just a 15% chance of a cut. Moreover, market sentiment leans toward rate cuts for March and May 2024.

Technical Analysis: DXY index bearish pressure persists despite potential for a minor correction

The indicators on the DXY daily chart reflect mainly bearish sentiment. With the index significantly below its 20, 100, and 200-day Simple Moving Averages (SMAs), the bears seem to have control on a broader scale. This is further emphasized by the Relative Strength Index (RSI) nearing oversold conditions, aligning with the overall index’s bearish outlook.

The Moving Average Convergence Divergence (MACD) shows rising red bars, indicating a slight increase in selling pressure. This could trigger a cautious buying signal for contrarian investors looking to take advantage of this oversold market condition. 

In summary, selling momentum appears to be dominant, but due to the oversold RSI and rising MACD red bars, a minor upward momentum can be expected. 

Support levels: 100.70, 100.50, 100.30.
Resistance levels: 101.30, 101.50, 101.70.

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