The U.S. Dollar is Set to Deteriorate before the New Year

The U.S. Dollar index (DXY) has declined by 0.1% to 101.60 this week, with the EURUSD rising by 0.1% to 1.10250. The Dollar, on the whole, has seen little change against its other major counterparts.

Several factors have contributed to the Dollar's ongoing correction. The Federal Reserve's preferred measure of inflation, the PCE index, fell to 2.6% YoY, below the anticipated 2.8%. On a monthly basis, the indicator turned negative to -0.1%, contrasting with the expected 0.1%. Core PCE also slipped below the Fed's 2.0% target.

Despite this data, the debt market has shown limited reaction, with U.S. 10-year Treasuries yields holding at around 3.90%. Treasury yields are experiencing overbought conditions, and they are expected to remain at this robust level for the time being.

Large investors are betting on a weaker Dollar, as evidenced by the capital outflow from the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), reaching its highest level since mid-June. Bets on the first Fed interest rate cuts in March have risen to 78.2% from 75.6%, according to the CME FedWatch Tool.

From a technical standpoint, the prevailing scenario suggests another downside wave for the Dollar. The EURUSD closed last week above the significant resistance at 1.10000 and is continuing its upward movement this week. This signals the likelihood of the most aggressive downside scenario for the Dollar, with the EURUSD potentially climbing to 1.11500-1.12500 by the end of the week. The ability to swiftly move away from the 1.10000 level will be crucial in confirming this trend.

While no specific data may strongly influence this movement, Thursday's release of Initial Jobless Claims could serve as a formal reason for the Dollar to experience further downward pressure.