The U.S. dollar index is looking to shake off a tough year with a rally to the August highs.
USDX – Daily Chart
The USDX has rallied from the lows at 96.37 and moved sharply to the resistance at 98.59. The market needs to cross that obstacle to test the 100 level once again.
The dollar index has declined by around 10% in 2025, despite the recent rally. Initial support from Donald Trump’s electionQ win led to selling on his tariff moves, and the USD saw its worst year since the late 1970s.
The dollar has been under pressure after the Federal Reserve was tipped to start a strong path of rate cuts this year. The market finally got one in September, but Fed Chair Jerome Powell has since thrown cold water on the idea that more will be coming soon.
The market now holds the belief that there will be two quarter-point rate cuts at the remaining two Fed meetings this year. Another for the first quarter of 2026 has also been priced into the market, in line with the Fed’s own guidance.
The week ahead will now focus on Friday’s release of the Personal Consumption Expenditures (PCE) price index. That is the Fed’s preferred gauge of inflation and could affect the outlook for rates if it remains high.
“We still see the balance of risks as skewed to the downside for the dollar into the core PCE release at the end of this week, with a 0.2% MoM print cementing expectations for two Fed cuts this year. That is, unless the geopolitical picture in Europe deteriorates,” said Francesco Pesole, an FX strategist at ING.
That assessment may be incorrect, as the market has been heavily bullish on the dollar, and the recent USDX move has likely been largely driven by short covering. That means further volume could enter the U.S. dollar to create new long positions if investors seek a safe-haven trade.
