Dollar Index Completes Bearish Pullback, Extends Rally as December Rate Cut Odds Fall

The US Dollar has surged to a six-month high, with the EUR/USD pair trading near 1.0650 during today's North American session. This rally is primarily driven by the election of Republican Donald Trump as the US President, which has strengthened the medium-term outlook for the USD.
Trump's proposed tax cuts and fiscal policies could add an estimated $7.5 trillion to the national debt over the next decade, according to the Committee for a Responsible Federal Budget. While this raises long-term debt concerns, markets are focusing on the short-term stimulative effects these policies may have on the economy. The possibility of the Republican Party securing a majority in both the Senate and the House of Representatives amplifies expectations that Trump's economic agenda will face fewer legislative hurdles.
From a macroeconomic standpoint, expansive fiscal policies can boost aggregate demand, potentially leading to higher GDP growth in the short term. However, they also carry the risk of increasing inflationary pressures. The Federal Reserve may need to adjust its monetary policy to balance these effects, potentially holding rates steady next year instead of further rate cuts. The odds of December rate cut have retreated from over 80% a week ago to around 65% currently. This shift reflects uncertainty about how Trump's policies will impact inflation and economic growth, as well as concerns about his protectionist trade stance.
The US Dollar Index , which measures the USD against a basket of six major currencies, has climbed above 105.50. The index's quick resumption of its upward trend after a brief profit-taking pullback suggests strong buying interest. This momentum increases the probability of a bullish breakout above the medium-term resistance level at 106:

The Euro is experiencing significant weakness, exacerbated by domestic issues within major Eurozone economies. The collapse of Germany's three-party coalition government comes at a precarious time, as the German economy grapples with slowing growth and industrial challenges.
The EUR/USD pair has broken below the lower bound of its ascending channel, invalidating the medium-term bullish technical structure. This breakdown suggests a high probability of the bearish trend continuing. With strong selling momentum, the next significant support level appears at 1.0500—a level where the price previously found robust buying interest and initiated medium-term rallies:

The British Pound is showing a mixed performance as investors await the UK's labor market data for the three months ending in September, scheduled for release tomorrow. The market consensus anticipates a slight uptick in the unemployment rate to 4.1% from 4.0%. Additionally, average earnings excluding bonuses are expected to grow by 4.7%, down from 4.9% in the previous period.
Wage growth is a critical factor influencing the Bank of England's monetary policy decisions. Softer wage growth could ease inflationary pressures in the services sector, potentially paving the way for further interest rate cuts. Last week, the BoE reduced its benchmark interest rate by 25 basis points to 4.75%, aligning with market expectations.
Technically, the pair appears poised for a short-term rebound; however, the key short-term bearish target likely resides lower, near the 200-SMA line:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.