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US Dollar steady after PCE did not change Fed’s rate projection for 2025 while US yields are softening

  • The US Dollar is residing not far from its fresh two-year high level seen in Asian trading on Friday
  • Quadruple Witching – the simultaneous expiration of four types of derivative contracts – is set to take place in the US trading session.
  • The US Dollar Index (DXY) reached 108.55 and looks set to end the year on a rather elevated level. 

The US Dollar (USD) is residing not far from its fresh two-year high of 108.55 that was hit during the Asian-Pacific trading session. The move was supported by rising US Treasury yields, widening the rate-differential gap with other countries. This means more support for the US Dollar because it becomes more valuable to invest in and get a nice return on your deposit.

Friday will be the last chance for traders to move any positions they might have with volatility set to spark up. That comes because of the so-called Quadruple Witching, which takes place four times per year – each third Friday of March, June, September, and December. During Quadruple Witching, four types of financial contracts expire simultaneously: stock index futures, stock index options, stock options, and single-stock futures. All these need to be rolled over, unwinded and settled, leading to a significant increase in trading volumes and sometimes volatility surrounding the main assets.

The US economic calendar saw already the release of the Personal Consumption Expenditures (PCE) Price Index for November. All data points came in below the consensus view, making it a rather disinflationary release. Though be it that the actual numbers are marginally lower, it does not change much to the recent stance from the Federal Reserve. 

Daily digest market movers: PCE not moving the needle anymore

  • Federal Reserve Bank of San Francisco President Mary Daly said during an interview on Bloomberg Surveillance, that even no rate cuts might happen in 2025. Should the labor market weaken further, more than two rate cuts could be put back on the table. 
  • A government shutdown is still looming in the US. A vote in the House of Representatives failed to pass the stopgap bill. Vice-President-elect JD Vance will meet with the Freedom Caucus this Friday to try and get the liquidation of the debt limit proposed, according to Bloomberg News..
  • President-elect Donald Trump, meanwhile, has shifted his focus to Europe by threatening with tariffs as well if the block does not make up its deficit in NATO by buying Oil and Gas from the US, Bloomberg reports . 
  • The Personal Consumption Expenditure (PCE) data for November has been released
    • Monthly Headline PCE came in at 0.1%, from 0.2%. The yearly gauge went to 2.4%, lower than the expected 2.5% and just above the previous 2.3%.
    • The monthly Core PCE measure fell to 0.1% from 0.3%, lower than the 0.2% estimate. The yearly component remained stable at 2.8%; below the 2.9% expected 
  • Around 15:00 GMT, the final reading for the University of Michigan data will be published. The Consumer Sentiment Index for December should remain stable at 74. The 5-year inflation expectation rate should also be unchanged at 3.1%.
  • Equities are not really seeing a Christmas rally unfold. Instead it rather looks like the Grinch is present on the trading floor, with all major indices across the globe in red numbers. In the US the Nasdaq is sliding lower by 1% ahead of the US Opening Bell.  
  • The CME FedWatch Tool for the first Fed meeting of 2025 on January 29 sees an 89.3% chance for a stable policy rate against a small 10.7% chance for a 25 basis points rate cut.  
  • The US 10-year benchmark rate trades at 4.50%, retreating from its fresh seven-month high at 4.59% seen Thursday.

US Dollar Index Technical Analysis: PCE not really game changer for the Fed

The US Dollar Index (DXY) is gearing up for the last rather normal trading day in terms of volumes. After another strong performance, it looks like the US Dollar will remain orbiting around elevated levels before heading into the New Year. The sole element that could trigger some softness would be if a Christmas rally emerges in equities and leads to a retreat in yields, softening the Greenback. 

On the upside, a trend line originating from December 28 2023 looks to have foiled any further uptick moves for now after two firm rejections on Thursday and Friday. The next firm resistance comes in at 109.29, which was the peak of July 14, 2022, and has a good track record as a pivotal level. Once that level is surpassed, the 110.00 round level comes into play. 

The first downside barrier comes in at 107.35, which has now turned from resistance into support. The second level that might be able to halt any selling pressure is 106.52. From there, even 105.53 could come under consideration while the 55-day Simple Moving Average (SMA) at 105.23 is making its way up to that level. 

US Dollar Index: Daily Chart

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.