DXY index: Is this the end of the US dollar index rally?

The US dollar index (DXY) retreated for three consecutive days ahead of the upcoming US nonfarm payrolls (NFP) data. It dropped from the year-to-date high of $109.53 to the current $108. So, will the DXY index bounce back or continue the ongoing downtrend?

Trump and his tariffs

The US dollar index continued its strong downtrend this week after the media reported that Donald Trump was considering shifting his stance on tariffs, claims that he has denied. 

Trump has committed to implement tariffs on most goods imported to the US, especially those from key trading partners like China, Mexico, European Union, and Mexico.

His goal for those tariffs is to reduce the trade deficit that has continued in the past few years. He also hopes to stir manufacturing in the US as companies seek for ways to avoid tariffs. Additionally, he sees tariffs as a good way to fund his tax cuts.

However, the reality is that these tariffs will not solve most of his goals. For one, it is unlikely that tariffs will lead to more manufacturing in the US, a country that has long bureaucracy, higher taxes, and minimum wage. 

Instead, Trump’s tariffs will likely lead to higher inflation as companies are forced to increase costs to cover the additional tariff costs. At the same time, countries will also retaliate by increasing tariffs on US goods.

Their tariffs may have a big impact on trade from the US. For example, Chinese airline companies will likely shift to the Airbus as cost of its planes fall. Other buyers of US oil may add taxes on it, making it more expensive. In other words, the US has more to lose than gain.

US jobs numbers and Fed minutes

The next key catalyst for the US dollar index will be the upcoming Federal Reserve minutes, which will come out on Wednesday.

These minutes will provide more information on what officials talked about in the last meeting of the year. In that meeting, they decided to slash interest rates by 0.25% and to maintain a fairly hawkish tone.

In a statement on Monday, Lisa Cook, a member of the Federal Reserve committee, noted that the bank would embrace a more hawkish tone this year. She believes that inflation is still stubbornly high, while the labor market has stabilized. 

The DXY index will react to the upcoming jobs data. The Bureau of Labor Statistics (BLS) will publish the latest job vacancy data on Tuesday. ADP, the biggest payroll company in the US, will release the private payroll data on Wednesday, while the Bureau of Labor Statistics (BLS) will publish the official numbers on Friday. 

These numbers will provide more information about the labor market, a key number that the Fed is watching when making the decision. 

Economists expect the data to show that the unemployment rate remained at 4.2% in December as it created over 140k jobs. 

DXY index analysis: is this the end of the rally?

DXY chart by TradingView

The US dollar index has been in a strong downtend this week. It moved from $109.53 to a low of $108. 

It has remained above the 50-day and 25-day moving average. The pair has retested the Woodie pivot point and moved slightly below the key support at $108.06, its highest point on $108.06. 

Therefore, the index will likely continue falling as sellers target the key support at $106.5, its highest swing in April 2024. That decline will be part of a break and retest pattern, which happens when an asset is in an uptrend. The index will then bounce back and move possibly to $110 later this year.