The USD faces pivotal resistance

The macro background seems to continue supporting a strong USD following the newly released CPI. Inflation in the United States climbed for the second consecutive month, remaining above the Fed’s target of 2%. The US non-farm payroll for November came to be stronger than expected, while the unemployment rate unexpectedly ticked up to 4.2%. These readings did not change expectations for the third 25 basis-point rate cut by the Fed next week. The US dollar, however, is facing a technical threshold.

The US Dollar index faces povital resistance

The dollar index has been moving between 100 and 107 since January 2023 and only briefly fell below 100 in July last year (Chart 1). At this level, markets will need a significant fundamental catalyst to lift the dollar to break above the resistance and rise to above 108.

From the technical perspective, the RSI showed an overbought signal and crossed down, suggesting the dollar could potentially retreat from such a level, at least, in the near term.

The US Dollar Index (DXY), daily

Source: TradingView as of 12 Dec, 2024

According to the CME Fed Watchtool, markets price in a 99% probability for a 25 basis-point rate cut this month. Certainly, the Fed remains on the course of an easing cycle. The dollar index follows the trend of the Fed funds rates (Chart 2). Hence, the dollar will likely decline if the Fed does not reverse its easing cycle. A Trump presidency can be a key driver of the trend if he does materialise all of his tariff policies in the new year, which is widely expected to bring inflationary pressure and promote the Fed to raise the interest rate again, in turn, pushing up the dollar.

DXY vs Fed funds rate

Source: TradingView as of 12 Dec, 2024

The third, the US 10-year government bond yield retreated from a key resistance level of 5% (Chart 3). The yield only topped this level in December 2023. Bond traders would keep caution here as a break though of this level could mean a significant further surge, implying a sharp selloff in the US government bonds. This may cause dramatically tight liquidity, and potentially cause a downturn in equities. It has previously happened in 2007 before the GFC. Thereby, it is unlikely that bond markets will go through this level easily unless a significant event.

The US 10-year government bond yield

Source: TradingView as of 12 Dec, 2024

Conclusion

The dollar may maintain its strength amid all the surroundings – a soft landing US economy, a Trump presidency, and a gradual Fed rate cut, etc. However, market players may not move as seen in the fundamental perceptions. They might choose to sell the dollar at some point, which may coincide with a profit-taking moment in the stock markets early next year, I assume.