US Dollar trades near mid-December highs ahead of eventful trading days

The Dollar Index is showing strong increases and is currently trading at 103.75, not far from its mid-December highs. Ahead of the Fed’s impending announcement on interest rate policy on Wednesday, markets are still wary.

Monday saw a sharp increase in the Dollar Index, which closed at 103.75, reaching levels not seen since mid-December. This increase precedes what is expected to be a busy week, featuring the first Federal Reserve (Fed) decision of 2024 on Wednesday and significant US labour market data on Friday.

In that sense, market expectations hint at a possible rate cut by the Fed in March. However, if economic growth sustains itself, a March rate cut seems unlikely. This is why bets have continued to shift toward the easing cycle beginning in May.

In case the US continues to show resilience and markets delay expectations of the cuts, the downside is limited for the short term. The Fed’s tone on Wednesday will be key for the markets to continue placing their bets on the rate cuts calendar in 2024, so the USD may face volatility.

Markets priced in that the Fed will hold its policy unchanged in its first meeting of 2024. The short-term trajectory will be determined if markets continue to give up on the easing cycle beginning in March.

January’s Nonfarm Payrolls are due on Friday and may affect those expectations. On Thursday, markets will also monitor ISM PMIs from the US from the first month of 2024.

The CME FedWatch Tool suggests a cut in March with odds of around 45%, with the possibility of an easing cycle starting in May at around 50%. US dollar bulls are regaining dominance, with medium-term bearish bias still intact. Daily charts show a positive slope in the Relative Strength Index and rising green bars in the Moving Average Convergence Divergence, indicating more substantial bullish influence.

The index is above the 20-day Simple Moving Average, favoring buyers, while below the 100-day SMA indicates a medium-term bearish bias. However, above the long-term 200-day SMA, the dominant trend remains bullish. The current technical environment suggests that while bears were briefly in control, DXY buyers are now on the runway to reclaim dominance.

Support Levels: 103.50 (200-day SMA),103.30, 103.00.
Resistance Levels: 103.90,104.00,104.20.