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The dollar’s rebound faces a key test as traders assess Fed expectations, geopolitics, and slowing spending.
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With inflation cooling and rate-cut bets rising, markets eye jobs data for policy clues.
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Technical signals suggest a DXY breakout, but resistance levels must hold amid volatility.
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Investors navigated a volatile week as fresh inflation data, escalating geopolitical tensions, and shifting rate-cut expectations shaped market sentiment. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 0.3% in January, aligning with forecasts. However, annual inflation cooled to 2.5% from 2.6%, reinforcing hopes for a policy shift.
Yet, it wasn’t just inflation data driving markets. A surprise contraction in consumer spending and heightened geopolitical risks weighed on the US dollar index (DXY). The tense exchange between U.S. President Donald Trump and Ukrainian President Volodymyr Zelenskiy rattled investors after their planned press conference was abruptly canceled. Trump's stark warning—“You are gambling on World War III, but you don’t have any cards in your hand right now”—deepened uncertainty, prompting a flight to safe-haven assets.
Dollar Index Attempts to Reverse Losing Streak
Despite a 1% gain last week, the DXY still closed February with a near 1% loss, its steepest monthly decline since September. The index struggled to hold ground after weeks of choppy trading, reflecting mixed market sentiment.
The dollar’s movement remains tied to Fed policy decisions and global uncertainty, with Trump’s rhetoric adding a new layer of unpredictability. Traders closely watch the Fed’s pace on rate cuts, as policymakers signal a cautious approach despite rising expectations for a policy shift.
On the data front, consumer spending—responsible for over 70% of U.S. economic activity—showed signs of slowing. January’s numbers met forecasts, but December’s upward revision to 0.8% masked underlying weakness. This slowdown raises concerns about economic momentum, fueling speculation that the Fed may pivot toward rate cuts sooner than expected.
Rate Cut Bets Rise After PCE Data
The core PCE inflation index, which strips out volatile food and energy prices, also rose 0.3% in January, in line with expectations. Following the release, rate-cut odds for June climbed to 71.4% from 70%. However, Fed officials remain cautious, insisting they need more evidence of cooling inflation and slower growth before committing to policy easing.
Policymakers also flagged trade tensions with China as a key risk, with new tariffs set to take effect on March 4. Markets are bracing for potential retaliation from Beijing, which could disrupt global trade and further complicate the Fed’s outlook.
Geopolitical Uncertainty Keeps Pressure on the Dollar
Beyond economic data, the dollar faced fresh pressure from diplomatic friction between the U.S. and Ukraine. Trump’s tense meeting with Zelenskiy raised eyebrows, particularly after a planned rare earth elements agreement failed to materialize. The delay creates uncertainty over China’s potential reaction, given its dominance in rare earth production.
Meanwhile, reports that China may target U.S. agricultural products in response to tariffs reignited fears of a renewed trade war. Any escalation could disrupt global trade balances and stoke further dollar volatility.
Bond Yields Signal Market Expectations
The U.S. 10-year Treasury yield edged above 4.20%, reflecting shifting market expectations on interest rates. While higher yields typically support the dollar, traders are increasingly betting on a June rate cut, signaling doubts about sustained strength.
This week’s focus turns to U.S. labor market data, with key releases including:
- Wednesday: ADP (NASDAQ:ADP) Private Sector Employment and the Fed’s Beige Book
- Thursday: Weekly Jobless Claims
- Friday: Non-Farm Payrolls (NFP)
Given the potential for market-moving data and further tariff developments, investors should brace for heightened volatility in the second half of the week.
Technical Outlook: DXY Eyes Key Resistance Levels
After trading in a downward channel since January, the DXY showed early signs of a rebound last week.
The index found support at a key Fibonacci retracement level, turning short-term exponential moving averages into support.
Key Levels to Watch:
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Resistance:
- 107.77 (Fib 0.382): First hurdle for bulls
- 108.61 (Fib 0.236): Strong resistance zone
- 109.98 (Previous peak): Breakout point for a potential trend acceleration
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Support:
- 107.08 (Fib 0.5): Backed by the EMA 8, key for short-term pullbacks
- 106.40 (Fib 0.618): Must hold to prevent further downside
- 105.42 (Fib 0.786): Potential demand zone if selling pressure resumes
The Stochastic RSI continues moving higher, reinforcing bullish momentum. Increased trading volume and price action near the upper boundary of the bearish channel suggest a potential breakout in the coming sessions.
With economic data, Fed policy shifts, and geopolitical risks all in play, traders should prepare for a turbulent week ahead.
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