This week’s developments have further highlighted the attractiveness of foreign exchange (FX) as an asset class. According to ING’s FX analyst Chris Turner, two distinct economic narratives have unfolded in the U.S. and Europe, bringing growth, interest rates, and currency valuation into sharper focus and reducing the gap between them.
Dollar Index (DXY) Stalls: Consolidation Expected in the 103.75–104.50 Range
The U.S. dollar appears to be entering a period of consolidation, with price action likely to remain within the 103.75–104.50 range in the near term. Market participants are closely monitoring key economic indicators and central bank signals, which could determine the next directional move.
With investors weighing global economic conditions and interest rate expectations, the dollar’s momentum remains uncertain. If buying pressure strengthens, a breakout above 104.50 could signal renewed bullish momentum. Conversely, a dip below 103.75 may invite further weakness. Until a clear catalyst emerges, sideways movement within this range may dominate trading activity.
Analysts have noted that the uncertainty surrounding the new U.S. administration’s tariff policies appears to be dampening confidence and affecting economic activity. One expert drew a parallel to Brexit, highlighting that investment in the U.K. had sharply declined ahead of the anti-EU vote due to uncertainty. However, it rebounded significantly even after a trade deal that was initially perceived as unfavorable was signed. A similar scenario could unfold in the U.S., where businesses and consumers are seeking stability but have yet to find it.
Recent softer U.S. economic data, coupled with a year-to-date decline in U.S. equities, has led to a 45-basis-point drop in short-dated U.S. swap rates—an essential factor in dollar pricing—compared to last month’s peak. Market sentiment has started to push the expected terminal rate for the Federal Reserve’s easing cycle below 3.50%. While this shift may have happened too quickly, the upcoming February jobs report is expected to provide further direction. The market seems to be bracing for weaker data, with expectations of a 160,000 job gain and an unemployment rate holding steady at 4.0%.
The U.S. dollar remains fragile and would likely weaken further if the jobs report disappoints. However, the DXY index has already experienced its most significant weekly drop since November 2022, and long dollar positioning is believed to be well below the levels seen in late 2022 after an extended two-year rally. The 104.00 level is seen as a key support for DXY, and unless the jobs report delivers a substantial downside surprise, the market may enter a consolidation phase within the 103.75–104.50 range. Given this week’s developments and the dollar index’s strong correlation with European currencies, analysts now suggest that DXY may have already reached its peak for the year.
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