The US dollar has moved sideways in recent days, pulled by two main forces at the same time.
First, markets have been adjusting their expectations for US interest rates. These changes show up in US bond yields and directly affect the US dollar.
Second, movements in major currencies inside the index, especially the euro and the yen, have also influenced the (DXY) because of their heavy weight.
Overall market risk sentiment played a key role. In the US, weaker-than-expected inflation data and mixed employment signals reduced the appeal of the US dollar’s higher yields. In Europe, the European Central Bank took a relatively firm policy stance, which supported the euro and pushed the US dollar index lower.
At the same time, the Bank of Japan communicated cautiously even after raising rates. This led to a weaker yen, which helped support the US dollar in some areas.
As a result, the US dollar index has settled into a narrow range, with opposing forces balancing each other rather than driving a clear upward or downward move.
Disinflation Surprise and Fed’s ’Data Dependence’ Framework
On the US side, the November inflation data had the quickest impact on the US dollar index. Annual inflation came in at 2.7%, well below expectations of 3.1%. Core inflation also fell to 2.6%. This strengthened the view that inflation is cooling again.
This matters for the US dollar because higher US yields often support US dollar strength. When cools faster than expected, markets start pricing in more room for the to cut rates. That expectation pulls US bond yields lower and reduces the US dollar’s yield advantage. After the inflation data, the United States 10-Year yield slipped to about 4.13%, and the US dollar index fell to around 98.2, showing this yield effect clearly.
The second key development came from the jobs data. beat expectations with a gain of 64,000, but the unemployment rate rose to 4.6%. This weakened the idea that growth and jobs remain strongly resilient. There were also concerns about data quality because the figures included distortions linked to the government shutdown.
Together, these signals failed to push the US dollar index clearly in one direction. Instead, markets focused more closely on how the Federal Reserve might respond to the data.
At the Federal Reserve, the in December and guidance for only limited cuts in 2026 kept the idea of more easing alive in the market.
At the same time, Chair Powell stressed that the future path of rates remained open and fully dependent on incoming data. This reduced expectations of a shift toward a clearly dovish policy stance.
Overall, the inflation surprise weakened the US dollar by reducing its yield advantage and pulling the US dollar index lower. However, the Fed’s cautious and flexible approach helped limit how far the US dollar fell.
Europe and the Basket Effect: ECB’s Tone, Euro and Sterling Channel
Because the euro carries a large weight in the US dollar index, messages from the European Central Bank played a major role last week. The ECB raised its growth and inflation forecasts for 2025 to 2027 while keeping interest rates unchanged. President Lagarde stressed uncertainty and said policy options remained open. This signaled that a rate-cutting cycle in the near term lacked certainty and that any easing could come later than markets expected.
This message arrived at the same time as the US inflation surprise. Together, they pointed to a narrowing interest rate gap between Europe and the US. That shift gave the euro room to strengthen. The euro’s move above 1.17 against the US dollar added downward pressure on the US dollar index because of the index’s structure. As a result, the weekly weakness in the US dollar index reflected euro strength as much as US data.
In the UK, the Bank of England cut rates by 25 basis points to 3.75%. At first, this looked negative for the pound. However, the close 5 to 4 vote split and guidance for a slower pace of cuts reduced expectations of aggressive easing. The pound’s move toward 1.34 added further pressure on the US dollar index through the currency basket and slowed any potential US dollar rebound.
Asia: Post-BoJ Rate Hike Communication and Yen Support
The Bank of Japan its policy rate from 0.50% to 0.75%. In theory, this should have narrowed the interest rate gap between the US and Japan and supported the yen. However, Governor Ueda gave little clear guidance on further tightening. This triggered a typical market reaction where traders bought the expectation earlier and sold once the decision became reality. As a result, the yen weakened.
The US dollar rose above 157 against the yen, which helped the US dollar index find short-term support through its yen component. At the same time, weakness driven by US factors and support coming from the weaker yen operated together. This kept the US dollar index moving up and down within a narrow range rather than following a clear trend.
In China, slowed to 4.8%, and retail sales rose by only 1.3%. These figures kept concerns about global growth on the table. Such data can affect the US dollar in two ways. If market risk appetite worsens, the US dollar can benefit from safe-haven demand. If commodity prices and commodity-linked currencies stay under pressure, the US dollar can also remain relatively firm.
Since risk sentiment has stayed broadly stable in recent days, the China data mainly served as a warning signal rather than a trigger for major market moves.
US Dollar Technical Outlook
On the daily chart, the US dollar index remains in a consolidation phase between 96.55 and 100. This follows a strong downward move in the first half of the year, with a clear bottom formed during the summer. The recent drop from the 100 area pushed prices toward the lower part of this range. Since then, the index has stalled again around 98.5 to 99, showing uncertainty about the next short-term move.
This price behavior suggests a swing market rather than a clear trend. Prices tend to move back and forth between key levels instead of continuing in one direction. The range itself remains the main guide.
Short-term moving averages, such as the 8-day and 21-day EMAs, sit very close to the current price. This setup allows for quick reactions in either direction. However, the longer-term 89-day EMA still slopes downward, which keeps the medium-term outlook cautious.
A move above the short-term averages alone may fall short of driving prices back to the top of the range. A stronger signal would require a clear break above the 99.3 to 99.7 resistance area. On momentum, the Stoch RSI shows improving upside momentum, suggesting selling pressure is easing. This improvement needs to continue as the price approaches resistance. If momentum fades near that zone, the risk of another downward swing increases.
In summary, the key levels on the daily US dollar index chart are:
Resistance levels
- 99.35 as an intermediate barrier
- 99.72 at the Fibonacci 0.236 level
- 100.21 is the top of the main trading range
Support levels
- 98.55 to 98.48 around the Fibonacci 0.144 area
- 96.55 at the Fibonacci 0 level and the base of the main range
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