US Dollar Index fundamental and technical analysis outlook for 2025
The US dollar has surged over 7% since October 2024, but can this momentum continue? Here's what the technical and fundamental analysis suggests.
US dollar index technical analysis and outlook for early 2025
The US dollar has witnessed an impressive 7% rally since October 2024, primarily driven by expectations surrounding Trump's economic policies and their potential impact on the Federal Reserve's (Fed) monetary stance.
While the forex market continues to price in a December rate cut, Fed Chair Jerome Powell's recent less dovish rhetoric, suggesting the economy shows no urgency for lower rates, may well support further dollar strength into early 2025.
The greenback's advance has been underpinned by robust US services data, resilient retail sales figures, and an uptick in core inflation for the first time since April 2023, putting previous rate cut expectations into question.
A likely 25 basis point cut in December may be followed by a more data-dependent approach in 2025, potentially supporting continued dollar strength.
Trump's tariff threats and interest rate differentials
President-elect Trump's recent signals point towards imminent trade restrictions, though US policymakers currently view any inflationary impact as transitory. The economic impact may prove more severe for export-dependent regions in Europe and Asia, potentially forcing more aggressive monetary easing in these areas compared to the US.
Recent disappointing eurozone purchasing managers index (PMI) data has markets anticipating a possible 50 basis point cut in January 2025, which could widen interest rate differentials further.
This divergence in monetary policy paths may continue to fuel demand for the US dollar.
Safe-haven status amid global uncertainties
Historical data shows the dollar typically strengthens during periods of heightened geopolitical tension, as evidenced during the 2018 US-China trade tensions. While markets appear better prepared for potential trade restrictions this time, tit-for-tat retaliation could still trigger unexpected volatility.
The forex landscape in 2025 may be dominated by ongoing geopolitical uncertainties and the delicate balance between growth and inflation.
Such uncertainty typically benefits the US dollar's safe-haven status. Then again de-escalation in the Middle East, both President Biden and President-elect Trump’s aim, could lead to softening in the greenback. This was the case over the past few days when the US Dollar Index slipped from its November 2-year high at 108.07 to this week’s 105.60 low, the first negative week this month.
Technical analysis suggests possible near-term correction
The Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report reveals US dollar positioning versus G10 currencies at its highest since July 2024, suggesting a possible near-term consolidation.
In addition, the daily relative strength index (RSI) shows a minor bearish divergence between the October and November highs, potentially signalling easing upward momentum. Having said that, this week’s retracement lower found support along the accelerated October-to-November uptrend line at 105.60.
US Dollar Index daily chart
Technical analysis also suggests that as long as the US Dollar Index remains below its November 108.07 peak, further range trading in the 105 to 100 band may occur next year, just as was the case for much of the past couple of years.
US Dollar Index monthly chart
Only if a rise above the recent two-year high at 108.07 were to occur on a weekly chart closing basis, would the odds favour a continued advance which may take the US Dollar Index to the 110.00 region. Further up lies another potential upside target for such a scenario at the September 2022 peak at 114.74.
While the index remains below 108.07, though, the middle of the last couple of years sideways trading range around the 104 mark may well be revisited.
Only an unexpected bearish reversal and fall through the July 2023 low at 99.22 would lead to a new bear market being created. Further, wide range trading between 108-to-100 looks to be a far more likely scenario for 2025.
Seasonal patterns and trading implications
Historical seasonal patterns indicate dollar weakness typically emerges between late November and December. January traditionally sees renewed dollar strength, which could align with current technical and fundamental factors.
Currency pairs like EUR/USD, GBP/USD and USD/JPY may require a technical reset before resuming their last few months trajectory.
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