Dollar Dominates: Tariffs and Steady Inflation Fuel Greenback’s Surge

The US Dollar Index (DXY) is poised to cap off a robust week, firmly entrenched above the 107.00 mark, as a confluence of economic data and geopolitical developments bolstered the greenback’s strength. While January’s Personal Consumption Expenditures (PCE) inflation data landed squarely within expectations, easing immediate concerns of runaway inflation, President Trump’s resolute confirmation of impending tariffs on key trading partners sent ripples through the markets.

Inflation Meets Expectations, Tariffs Loom:

January’s PCE figures, a closely watched gauge of inflation, provided a sense of equilibrium. Monthly headline PCE registered a 0.3% increase, mirroring the previous month’s reading. Core PCE, excluding volatile food and energy prices, ticked up slightly to 0.3%, while the annual headline PCE remained steady at 2.6%. The core PCE, however, eased to 2.6% from a revised 2.9% in December. This data, aligning with forecasts, offered a measure of reassurance to investors, suggesting that inflationary pressures, while persistent, are not spiraling out of control.

However, any sense of calm was tempered by President Trump’s reaffirmation that tariffs on Canada, Mexico, and China would be implemented on March 4th. This move, signaling a hardening stance on trade, injected a dose of uncertainty into the global economic landscape, further fueling the dollar’s safe-haven appeal.

Market Dynamics and Geopolitical Tensions:

The DXY’s ascent, currently registering a 0.60% weekly gain, was further supported by improving risk sentiment, with US equity markets recovering from earlier losses. The Chicago Purchasing Managers Index (PMI) also provided a positive surprise, jumping to 45.5, surpassing expectations and indicating a potential uptick in manufacturing activity.

Meanwhile, on the international stage, tensions between President Trump and Ukrainian President Volodymyr Zelenskyy escalated over peace deal negotiations. This diplomatic friction added another layer of complexity to the global geopolitical landscape, potentially contributing to the dollar’s strength amidst uncertainty.

Technical Outlook: Bullish Momentum Holds:

Technically, the DXY remains comfortably above the 100-day Simple Moving Average (SMA) at 106.60, a key support level. Technical indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), suggest a mild recovery, though further bullish momentum is necessary for a sustained rally. Resistance is observed at 107.50, while support levels at 106.60 and 106.00 will be crucial should selling pressure emerge. The CME FedWatch Tool currently indicates a 30% probability of the Federal Reserve maintaining current interest rates in June, with the majority anticipating potential cuts, a factor that will continue to influence dollar valuations.

The US dollar’s strong performance this week reflects a combination of steady economic data, looming tariff implementations, and heightened geopolitical tensions. As markets digest these factors, the DXY’s trajectory will continue to be closely monitored by investors worldwide