US Dollar Weekly Forecast: Sell-off done?

The week that was

The Greenback retreated for the third consecutive week and remains well on track to end its second straight month of losses.

That said, the US Dollar Index (DXY) remained well on the defensive, approaching the key 98.00 contention zone to hit new two-month troughs. It also extended its recent breach below the critical 200-day SMA around 99.30, which could lead to further weakness in the short term.

The Greenback’s deeper retracement, however, came in contrast to the decent recovery in US Treasury yields across various maturity periods, as investors continued to digest the Federal Reserve’s (Fed) widely expected decision to lower its Fed Funds Target Range by 25 basis points to 3.50%-3.75%.

A Fed that cut because it had to, not because it wanted to

This meeting left the impression of a Fed that moved with a degree of reluctance. The rate cut wasn’t about victory over inflation; it was about acknowledging that the labour market is losing momentum and that the risks of waiting too long are starting to outweigh the risks of moving a little early.

Inflation, by the Fed’s own standards, still isn’t quite where it should be. But officials appear increasingly comfortable with the idea that the remaining stickiness is driven by temporary factors, tariffs chief among them, rather than by an overheating economy. That distinction matters, as it provides policymakers with a buffer to pause, monitor, and refrain from overreacting to data that may eventually fade.

Inside the Fed, there’s still clear disagreement over how quickly policy should be eased from here. Some prefer to proceed cautiously, reducing rates only when the data demands it, while others prioritise the increasing indications of stress in the job market. What unites them, though, is the sense that the tightening cycle is over. Rate hikes are no longer part of the conversation.

With policy now sitting close to the upper end of what officials consider neutral, the Fed has shifted into a familiar posture: wait and see. From here, every decision is likely to be framed as risk management, balancing incomplete progress on inflation against a labour market that’s cooling faster than many expected. For now, the message is clear enough: easing has begun, but it will be cautious, uneven, and entirely data-driven.

Fed dissenters strike a cautious tone

While the Fed moved ahead with an interest rate cut this week, not everyone around the table was convinced the time was right. Several officials who voted against the decision made clear on Friday that, in their view, inflation remains too sticky and the data too thin to justify lower borrowing costs just yet.

Inflation worries still front and centre

Chicago Fed President Austan Goolsbee explained that his dissent reflected a preference for patience. He said he would have waited for additional inflation and labour market data before easing policy, particularly given how sensitive businesses and households still are to rising prices.

Goolsbee argued that delaying a cut until early next year would have allowed policymakers to assess a fresh batch of official data, with several key reports due as soon as next week. In his assessment, that approach would have carried little risk to employment, noting that the job market appears to be cooling, but only at a moderate pace.

A similar line came from Kansas City Fed President Jeffrey Schmid, who said he opposed the cut because inflation remains “too hot”. He argued that monetary policy should stay modestly restrictive to ensure price pressures continue to ease. From his perspective, the economy is still showing momentum, and inflation dynamics suggest policy is not yet tight enough. He added that little has changed since he dissented from the October rate cut, pointing out that inflation is still above target while the labour market remains broadly balanced.

Labour market risks seen differently

Not all those who dissented were solely concerned with inflation. Philadelphia Fed President Anna Paulson struck a slightly different note, saying she remains more concerned about potential weaknesses in the labour market than about upside inflation risks.

Speaking at an event in Wilmington, Paulson said she sees a reasonable chance that inflation will continue to fall over the course of next year. She linked that view to the fading impact of tariffs, which she described as a key factor behind inflation overshooting the Fed’s target this year. That expected easing, she suggested, gives policymakers some room to focus more closely on employment risks.

Preference for tighter policy still evident

Cleveland Fed President Beth Hammack, however, made it clear she would prefer policy to lean more firmly against inflation. She said the current policy rate is sitting close to neutral and argued that a slightly more restrictive stance would help apply additional pressure on prices.

Taken together, the comments underline how finely balanced the debate within the Fed remains. While the majority opted to begin easing, the dissenting voices suggest confidence in inflation is far from complete, a reminder that the path ahead for US rates is likely to remain uneven and highly data-dependent.

Technical picture

After briefly breaking above the 100.00 handle in November, the US Dollar Index (DXY) has slipped into a corrective phase and, so far, has struggled to regain its footing.

For the broader outlook to turn decisively bullish again, the index would first need to reclaim the 200-day SMA at 99.34. Beyond that, attention would shift to the November peak at 100.39 (November 21), followed by the weekly high at 100.54 (May 29) and the May cap at 101.97 (May 12).

On the downside, initial support is seen at the December base at 98.13 (December 11). A sustained break below that level would likely open the door to a move towards the weekly trough at 98.03 (October 17), with further weakness potentially dragging the index down to the 2025 bottom at 96.22 (September 17). Below there, the focus would turn to the February 2022 valley at 95.13 (February 4) and, ultimately, the 2022 floor at 94.62 (January 14).

Momentum indicators continue to point to downside risks. The Relative Strength Index (RSI) is hovering around the 35 area, while the Average Directional Index (ADX), now above 20, suggests the current trend is starting to gather strength.

Bottom line: uncertainty still calls the shots

The US Dollar has clearly lost some of its lustre. Momentum has faded, confidence is shaky, and the Fed has done little to give traders the clear roadmap they’re looking for. However, the situation is not static. A handful of officials are still flying the hawkish flag, and that’s enough to give the Greenback some short-term support when positioning gets stretched.

The bigger complication is the lingering fallout from the historic government shutdown. On the surface, the US economy still looks reasonably healthy, but without up-to-date data, that picture is incomplete at best. Until those delayed releases finally land, policymakers and markets alike are effectively flying blind, and when they do arrive, they could quickly reshape expectations for the Fed’s next move.

For now, inflation remains the main event, with the labour market playing a crucial supporting role. If price pressures turn out to be stickier than hoped, the Fed may be forced to lean back towards restraint. Should that happen, the Dollar could yet find a path to redemption, but until then, uncertainty remains firmly in charge.