- The US Dollar retraces after failing to test 110.00 but remains 0.7% higher intraday.
- Trump imposes 25% tariffs on Canada and 10% on China, sparking concerns over inflation.
- The ISM Manufacturing PMI surpasses expectations, boosting confidence in US economic resilience.
- The DXY Index consolidates above 108.00 as traders digest trade policies and economic data.
The US Dollar Index (DXY), which measures the value of the US Dollar against a basket of currencies, retreats slightly after failing to test the 110.00 level but remains well-supported above 108.00. Investor focus shifts to the latest US tariffs, with President Trump imposing a 25% tariff on Canada and 10% on China. These measures have heightened inflationary concerns, fueling speculation on how the Federal Reserve may respond.
A 25% tariff on Mexico was shelved for one month after Mexican President Claudia Sheinbaum agreed to send 10,000 troops to the US-Mexico border in order to reduce drug smuggling. Both leaders said they would attempt to hammer out a trade deal to forestall the tariffs.
Additionally, January’s ISM Manufacturing PMI exceeded expectations, suggesting continued strength in the US economy and reinforcing the US Dollar’s resilience in global markets.
Daily digest market movers: US Dollar firms as markets assess tariffs and data
- The US Dollar remains elevated as markets digest the impact of Trump’s new tariffs on major trading partners.
- The pause of tariffs on Mexico arrested a global sell-off in financial markets, sparked by his decision to move forward with tariffs on goods from Canada and China.
- Trump also threatens additional tariffs on the European Union, criticizing their trade policies and lack of US imports.
- On the data front, the ISM Manufacturing PMI for January climbed to 50.9 from 49.3, exceeding market expectations of 49.8.
- The Prices Paid Index, a key inflation measure, rose to 54.9 from 52.5, signaling persistent pricing pressure.
- The Employment Index improved to 50.3 from 45.4, indicating stronger labor market conditions in the manufacturing sector.
- The New Orders Index jumped to 55.1, reflecting growing demand and business optimism despite trade tensions.
- The CME FedWatch Tool indicates an 80% probability that the Fed will keep rates steady at the March meeting.
DXY technical outlook: Bulls aim for 110.00 as indicators recover
The US Dollar Index remains supported above 108.00, showing resilience despite retracing from its recent rally. Momentum indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are recovering, suggesting a potential continuation of bullish momentum.
If buying pressure persists, the DXY could attempt to retest 110.00 in the near term. Key resistance lies at 108.80, with additional upside barriers at 109.50. On the downside, support is seen around 107.80, with a break below this level potentially shifting sentiment toward a more corrective phase.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
