US Dollar Index loses ground below 102.60, investors await US housing data

• The US Dollar Index (DXY) drifts lower to 102.45 on Monday.
• The dovish remarks from Federal Reserve (Fed) officials triggered a rally in US equities and weighed on the USD.
• Traders await the US Building Permits and Housing Starts, due on Tuesday.

The US Dollar Index (DXY), a measure of the value of the US Dollar (USD) against a weighted basket of currencies used by US trade partners, loses traction during the early European session on Monday. The DXY bounces off the multi-month lows of 101.77 and currently trades near 102.45, losing 0.15% for the day.

The stronger US Services PMI on Friday lends some support to the Greenback. However, the upside remains limited amid the anticipation of three rate cuts from the Federal Reserve (Fed) next year. Data released on Friday showed that a flash reading of US S&P Global Services PMI rose to 51.3 in December from 50.8 in November, beating the market expectation of 50.8. The Manufacturing PMI dropped to 48.2 in December, compared to 49.4 in November and market expectations of 49.3. Finally, the Composite PMI climbed to 51.0 in December versus 50.7 prior.

The dovish stance from the Fed triggered a rally in US equities and exerted some selling pressure on the Greenback. Money markets now see a nearly 75.0% chance of at least a 25-basis point rate cut in March 2024, up from about 64.5% before the latest policy decision, according to CME Group’s FedWatch tool.

Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee said on Sunday that it’s too early to declare victory over the inflation war, and the decisions on rate cuts will depend on upcoming economic data, whereas Atlanta Fed President Raphael Bostic said the central bank can begin cutting the interest rate in the third quarter of 2024 if inflation falls as expected.

The possible Fed rate cuts next year also weigh on US Treasury bond yields. The US 10-year Treasury note yields reached multi-month lows and stand near 3.90% as the Fed indicated that it would cut interest rates three times in 2024 after its latest meeting.

Traders will keep an eye on the US Building Permits and Housing Starts, due on Tuesday. Later this week, the US Consumer Confidence and Existing Home Sales will be released on Wednesday. The US Gross Domestic Product (GDP) Annualized (Q3) will be due on Wednesday, which is expected to remain steady at 5.2%. The Core Personal Consumption Expenditures Price Index (Core PCE) on Friday will be in the spotlight.