The dollar fell sharply — and here's why

[Ben Graham]

Yesterday, the US dollar temporarily lost all the gains it had achieved at the start of the week. This happened after US manufacturing activity in December contracted at its fastest pace since 2024, bringing a challenging year for American factories to a close.

According to data released on Monday, the Institute for Supply Management (ISM) manufacturing activity index fell from 48.2 to 47.9. This indicator has been below 50 points for ten consecutive months, signaling a contraction in production. The decline in the index highlights the growing challenges faced by US manufacturers, who are grappling with weakening demand, bloated inventories, and ongoing uncertainty in the global economy.

The current situation contrasts sharply with the period of rapid post-pandemic growth, when manufacturers struggled to meet rising consumer demand. Now, consumers are spending less on goods and focusing more on services, while high interest rates and inflation constrain purchasing power.

The drop in manufacturing activity puts pressure on the Federal Reserve. Weak economic data may force the Fed to reconsider its interest rate strategy to avoid overly restraining the economy.

Because material costs remain high, new orders have declined for the fourth consecutive month. Export orders also remain relatively weak.

One positive aspect in the report was the fastest reduction in client inventories since October 2022, suggesting that factory orders and production volumes could stabilize in the coming months. Nevertheless, tariffs and overall economic uncertainty—driven by changes in trade policy under President Donald Trump during his first year in office—have created challenges for many companies considering expansion plans.

According to the ISM report, fifteen sectors experienced contraction in December, primarily in apparel, woodworking, and textiles. Growth was observed in only two sectors, the fewest since the end of 2023.

As noted above, all of this negatively impacted the US dollar, contributing to gains in the euro and British pound.

Technical Outlook for EUR/USD

For buyers, the current focus should be on capturing the 1.1750 level. Only by doing this can they aim to test 1.1780. From there, the next target is 1.1810, though reaching it without support from major market players will be difficult. The farthest target is 1.1840.

If the instrument falls to around 1.1715, I would expect some action from large buyers. If there is no activity there, it would be advisable to wait for a retest of the 1.1685 low or open long positions from 1.1660.

Technical Outlook for GBP/USD

For pound buyers, the immediate target is to break the nearest resistance at 1.3560. Only after this can the pair target 1.3590, above which further gains will be challenging. The farthest target is the 1.3625 level.

In the event of a decline, bears will try to take control at 1.3530. If they succeed, breaking this range could seriously damage bullish positions and push GBP/USD toward the 1.3500 minimum, with a potential move down to 1.3470.

The material has been provided by InstaForex Company - www.instaforex.com