Trump Seems to Dislike Strong Dollar

The U.S. Dollar Index (DXY) dipped by 0.14% to 109.50 points this week, while the EURUSD edged up by 0.10% to 1.02550. Though the decline of the Greenback may appear minor, it is notable in the context of the current environment, where expectations of further Dollar strength have become highly pronounced. Speculation about the Dollar surpassing the Euro has been widespread, with the options market projecting GBPUSD to trade in the 1.11000-1.12000 range amid financial challenges facing the U.K. government. Meanwhile, the People’s Bank of China (PBOC) is signaling potential Yuan devaluation in response to anticipated U.S. tariff increases.

The Dollar’s rising momentum became the dominant narrative over the weekend, making Dollar-denominated assets a staple in portfolios. The EURUSD dropped to 1.01771 on Monday as the Greenback strengthened, but this rally lost steam after speculation emerged about the new U.S. administration considering a gradual increase in tariffs instead of an abrupt hike. This prompted the EURUSD to rebound to 1.02774, suggesting potential for further upside correction. Additionally, the PBOC’s intensified efforts to support the Yuan could influence broader currency trends, as the central bank has a history of successfully reversing market trends.

Attention is now focused on upcoming U.S. inflation data. Expectations point to an increase in December, with consumer prices potentially rising to 2.9% YoY from 2.7%. This could delay Federal Reserve (Fed) rate cuts, providing additional support for the Dollar. However, speculation that President-elect Donald Trump may exert pressure on the Fed to moderate its hawkish tone introduces uncertainty to the Dollar’s trajectory. If this speculation proves accurate, the Dollar’s continued strengthening may not be guaranteed.

Large investors have placed significant bets on a rising Dollar over the past two weeks. Still, the sustainability of these positions is uncertain, as similar patterns in other asset classes over the New Year period have seen prices return to baseline after brief spikes.

From a technical perspective, the EURUSD has support at 1.01500-1.01700 and resistance at 1.02800-1.03000. A breakout above resistance could see the pair climb to 1.04700-1.05700, with potential to extend gains towards 1.09500-1.10500. Conversely, a drop below support would reaffirm Dollar strength and open the door for further declines.