Dollar Is Still Striving to Go Down

The U.S. Dollar Index (DXY) has gained 0.49% to reach 108.15, while the EURUSD has declined by 0.35% to 1.03960. This follows last week’s hawkish Federal Reserve (Fed) meeting, where policymakers maintained a firm stance despite a widely expected 0.25% interest rate cut. The Fed revised its economic outlook, reducing its forecast for interest rate cuts in 2025 to two from the previously expected four in September.

The EURUSD dropped 1.3% to 1.03430 after the Fed meeting, driven solely by the central bank's hawkish rhetoric. Friday’s lower-than-expected November PCE Index, which pointed to milder inflation, raised concerns over Fed actions. The headline PCE rose 2.4% YoY, below the 2.5% consensus, while core PCE remained unchanged at 2.8% YoY, missing expectations of 2.9%.

The Euro closed last week at 1.04340 against the Dollar, highlighting unusual behavior from the Fed, which some investors interpret as preemptive action. Policymakers may be preparing for potential inflationary pressures stemming from U.S. President-elect Donald Trump’s expected tariff increases on China and other nations. This explanation aligns with the Fed’s actions despite positive incoming economic data.

Large investors, however, have shown little reaction to the Fed’s stance. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported a neutral inflows balance last week, following net outflows of $19.7 million in the prior week. This suggests that large investors may be positioning for a weaker Dollar, potentially targeting a EURUSD rally to 1.09000-1.10000, representing a 4.0-5.0% upside from current levels. Confirmation of this scenario would require the pair to break through resistance at 1.05300-1.05500.

Near-term upside drivers for the EURUSD appear limited as trading volume is expected to decrease amid the holiday season. This week’s U.S. initial jobless claims, scheduled for Thursday, are unlikely to have a significant impact on the pair.

Looking ahead to next week, light trading during New Year celebrations could create some volatility around the release of key PMI data. A potential test of resistance at 1.05300-1.05500 remains plausible as the EURUSD enters a possible reversal phase.