The US Dollar Index (DXY) has recently fallen through the important support line of 99.0. This sharp decline mirrors a toxic combination of soft employment data and rising uncertainty about policy credibility. Markets are intently focused on all of these variables as we progress through December. Whether this might lead the dollar to fall deeper, in accord with the usual bearish seasonal patterns of the month, is hard to say.
Scotiabank’s Chief FX Strategists, Shaun Osborne and Eric Theoret, recently pointed out that the DXY is already signaling net losses. All of these movements have contributed to pushing the index well below the 99.0 threshold. Their forecast goes all the way down into the mid-97 range.
Osborne added that the DXY is currently on track for a net loss today. This deterioration is forcing the index below the important 99.0 technical support level and targeting declines in the mid-97 range. That weekly price action is locking in a DXY move lower. This observation is not just from a technical analysis perspective. As a result, dollar seasonals are bearish in December, though decidedly and rather dependably, so!
In addition, the dollar is weakening, creating pressure on long-end yields to steepen. This shift poses troubling questions about the long-term credibility of US monetary policy. This increase in yields is emblematic of market concern regarding how potential policies might affect long-term economic security. That steepening curve is an illustration of how much more nervous investors are becoming. They are worried about how the Fed’s judgment will be rated in the months ahead.
The new employment situation data has only compounded such fears, suggesting much weaker-than-expected jobs growth in the US economy. This dovish outlook is in line with the prevailing market sentiment. It is an encouraging sign that a change in policy direction could be on the horizon.
Moreover, the political dynamics around Federal Reserve nominations are playing a role in distorting market expectations. According to news reports, the odds of Kevin Hassett being nominated have increased significantly over the last few weeks, as indicated by betting peaks on Polymarket. A Hassett-led Federal Reserve would likely bring more dovish policy from that agency, continuing to undermine the value of the dollar.
Hassett’s chances of being nominated have gotten better over the last few weeks. The US yield curve has steepened modestly in response, a sign that the market may be worried about the long-term credibility of policy, as Theoret described. “That is not helpful for USD sentiment.”
Technical analysis and seasonal trends both point to a strong case for traders to prepare for more USD downside as December progresses. Combined with a backdrop of weak economic indicators and a changing political landscape, the dollar currently is under significant pressure. Consequently, investors are recalibrating their expectations to make competitive offers in the changing playing field.