Dollar under pressure in front of key launches

[Ben Graham]

*) see also: InstaForex Trading Indicators for USDX

The US dollar remains under pressure ahead of important US macroeconomic releases. Ahead of the Tuesday US session, the US dollar index (USDX) is trading around the prior day's lows and near the 96.80 mark.

January data are expected to show a stable labor market picture and continued slowing in inflation. The unemployment rate is expected to remain unchanged at 4.4% and average hourly earnings are forecast to rise modestly by 0.3%. Employment is expected to increase from 50k to 70k new jobs, reflecting resilience in the labor market, contrary to earlier assumptions of further weakening.

Inflation is also expected to moderate. The Consumer Price Index (CPI) is forecast to slow from 2.7% to 2.5%, while core inflation is projected to ease from 2.6% to 2.5% year-on-year. These factors strengthen the Federal Reserve's case for a possible move toward a softer monetary stance ("dovish" tilt) in the near term.

Supporting this view was a recent comment by Fed governor Stephen Miran, who noted that tariffs imposed by US President Donald Trump were less severe than experts expected. The bulk of the tariff burden has fallen on foreign firms with minimal direct impact on the domestic economy, creating a more favorable backdrop for interest rate cuts without endangering growth.

At the same time, despite optimism from some Fed officials, economists remain cautious about the timing of policy moves. Most expect the Fed to cut borrowing costs only twice this year, with the first step likely in June, conditional on the confirmation of Kevin Warsh as the next Fed chair to succeed Jerome Powell.

Key publications this week include ADP employment data (Tuesday at 13:15 GMT), the NFIB small-business optimism index, and December retail sales. Attention today is on retail sales, which are forecast to rise by 0.4% month-on-month. This positive signal underlines the resilience of the US consumer and the ability to sustain high spending even amid macro uncertainty.

These releases can help define a medium-term corridor for the USDX and the potential for the index to consolidate in the 96.50–97.50 range over the coming days.

The base scenario remains bearish. If weak employment and inflation prints are confirmed and the White House maintains aggressive rhetoric toward the Fed, the US dollar index is highly likely to test and break below the 96.90 mark. That would open the way to the 96.20–96.00 area and shift the index into a prolonged global bearish trend, as we outlined in our previous review "Trust 'trouble-free' dollar undermined."

Further movement will depend mainly on incoming labor market data, including the key releases from the US Department of Labor.

*) see also the USDX dynamics scenarios in our yesterday's review.

Conclusion

Thus, the market is preparing to follow economic indicators closely — they can bring clarity and shape the Fed's next policy steps.

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