US Dollar adds to gains with tariff talk and PCE as main drivers

• The US Dollar outperforms against most major peers on Friday ahead of the US PCE data release. 
• US President Trump has announced 25% tariffs on Mexico and Canada as of Saturday. 
• The US Dollar Index (DXY) moves away from 108.00 and hits a fresh weekly high at 108.37. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, currently trades at 108.25 at the time of writing and is receiving quite a few tailwinds this Friday. The first one comes from US President Donald Trump, who announced a first wave of tariffs on Mexico and Canada. The Trump administration will impose 25% tariffs on about $900 billion in goods from both Canada and Mexico, Bloomberg reports. The US President also threatened to impose 100% tariffs on BRICS nations if they try to replace the US Dollar with a new currency in international trade. 

Meanwhile, the economic data calendar is helping the Greenback as well. In Europe, inflation data from Germany came in substantially lower than expected. This boosts the interest rate cut expectations for the European Central Bank (ECB) this year and widens the differential between the US and the Eurozone. In the US, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures numbers, will be released later in the day. 

Daily digest market movers: Finally some inflation data

• Asian markets remain quiet this week due to the Lunar New Year, which started on Tuesday, with Chinese traders returning to the markets on February 5. 
• Volatility and nervousness are expected at the opening trade on Monday if US President Trump finally unleashes 25% tariffs on Canada and Mexico.
• Trump reiterated on Thursday his threat of imposing 100% tariffs on BRICS nations if they try to replace the US Dollar (USD) with a new currency in international trade. Trump posted on TruthSocial: “We are going to require a commitment from these seemingly hostile countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariff,” and continued “there is no chance that BRICS will replace the US Dollar in international trade, or anywhere else, and any country that tries should say hello to tariffs, and goodbye to America!”
• At 13:30 GMT, US Personal Consumption Expenditures (PCE) Price Index data for December is due:
  • Monthly headline PCE is expected to tick up  0.2% from 0.1% in November.
  • Monthly core PCE is expected to jump  0.3% from 0.1% the previous month.
• At 14:45 GMT, the Chicago Purchasing Managers’ Index for January is due. The expectation is for an uptick to 40 from 36.9 in the prior reading, still in contraction. 
• Equities are adding to gains, mostly based on the bigger interest rate cut prospects from the ECB after lower German inflation data was released earlier this Friday.
• The CME FedWatch tool projects an 82.0% chance for no change in the Fed’s policy rate for its next meeting on March 19. 
• The US 10-year yield is trading around 4.524%, bouncing higher after hitting a fresh January low at 4.484% on XXX.

US Dollar Index Technical Analysis: Headline-filled weekend

The US Dollar Index (DXY) will face a shaky weekend while markets remain closed for business until Monday morning in Asia. With tariffs imposed on Canada and Mexico as earliest as Saturday, traders will be unable to move positions until  Asian markets open, which means volatility is set to surge. Once the European session kicks in,the dust will start to settle on whichever event takes place over the weekend, with the DXY expected to remain caught between 107.30 to the downside and 109.30 on the upside. 

Once 108.00 level has been acquired, the next level to pare back earlier losses is 109.30 (July 14, 2022, high and rising trendline). Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high). 

On the downside, the 55-day Simple Moving Average (SMA) at 107.67 and the October 3, 2023, high at 107.35 acts as a double support to the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels.

US Dollar Index: Daily Chart