DXY Rally Stalls After Mixed Retail Sales Data

The US dollar’s recent rally has paused following the release of November retail sales figures, which offered a mixed picture of consumer spending. While the headline number slightly exceeded expectations, other key indicators fell short, leaving traders unimpressed and the US Dollar Index (DXY) hovering around the 107.00 mark.

Retail sales grew by 0.7% in November, surpassing the 0.5% forecast and prompting a revision of the previous month’s figure to 0.5% from 0.4%. However, this positive surprise was tempered by a decline in retail sales excluding automobiles and transportation, which fell to 0.2%, missing the 0.4% estimate. This discrepancy, coupled with only marginal revisions to previous data, has dampened enthusiasm for further dollar buying.

Adding to the mixed economic signals, November’s industrial production remained in contraction at -0.1%, failing to meet the consensus forecast of 0.3% growth. These data points suggest a more nuanced economic picture than the robust growth implied by the previous US Services PMI release, contributing to the dollar’s stall.

Despite the mixed economic data, the Federal Reserve is still widely expected to implement a 25 basis point rate cut at its meeting on Wednesday. This anticipated move presents a potential “Goldilocks” scenario in the short term. However, growing expectations that the Fed will slow its rate-cutting cycle in 2025 are providing underlying support for the dollar.

Geopolitical factors are also playing a role in currency markets. Political instability in Europe, particularly in Germany following a recent vote of no confidence against Chancellor Olaf Scholz and upcoming snap elections, combined with ongoing challenges in France, is weakening the Euro. Given the Euro’s significant weighting (57.6%) in the DXY, its weakness is indirectly supporting the dollar.

Market Movers and Technical Outlook

Other market indicators ayre also reflecting a cautious sentiment. Equity markets are showing signs of fatigue, with Asian and European indices declining and US futures also weakening. The CME FedWatch Tool indicates a 95.4% probability of a 25 basis point rate cut by the Fed. The US 10-year benchmark rate, after reaching a three-week high of 4.43%, has retreated to 4.39%.

From a technical perspective, the DXY is struggling to break decisively above the 107.00 level. A firm daily close above this level is needed to open the way for a potential move towards 108.00 and the recent two-year high of 108.07 from November 22. On the downside, 106.52 provides initial support, followed by the key level of 105.53 (the April 11 high) and then the 104.00 region. The 200-day Simple Moving Average at 104.19 could provide further support in case of a deeper decline.

The US dollar finds itself at a crossroads. While underlying support remains from expectations of a slower Fed rate-cutting cycle and European political uncertainty, the mixed economic data has tempered enthusiasm and created a period of consolidation. The DXY’s near-term direction will likely depend on its ability to break decisively above the 107.00 resistance level and the Fed’s pronouncements following its upcoming policy meeting.