The US Dollar (USD) is under pressure from weak employment data and signs that the Federal Reserve may adopt a more cautious approach. While the OIS markets are uncertain about predicting deeper rate cuts, the Dollar Index (DXY) has fallen below 99.0, indicating it may drop further. Concerns about policy credibility, especially with the possible nomination of Hassett to the Federal Reserve, have led to a steeper US yield curve. These developments are not beneficial for the USD, with expectations that the terminal rate will stay around 3% until late 2026.

Market Behavior and Seasonal Patterns

Market behavior points to continued weakness in the USD, as the DXY has fallen below the 99.0 support level and is now aiming for the mid-97 range. Technical analysis and seasonal patterns indicate a downward trend for the Dollar, especially since December is typically a bearish month. The FXStreet Insights Team shares market observations from various experts and analysts. The US Dollar is weakening, and we expect this trend to persist in the upcoming weeks. The November jobs report showed only 95,000 new jobs, far below the expected 180,000, strengthening the market’s belief that the Federal Reserve will take a softer approach. This weak data, combined with seasonal trends favoring a drop in December, suggests more decline for the dollar. There are rising concerns about new leadership at the Fed, which the market thinks may be less focused on controlling inflation. This has caused the yield curve to steepen, with the spread between 2-year and 10-year Treasury yields widening to 40 basis points. This signals anxiety about long-term policy credibility. As long as odds for a dovish Fed chair nominee remain above 60% on Polymarket, this will likely weigh on the dollar.

Technical Outlook and Trading Strategies

Technically, the Dollar Index (DXY) has fallen through the important support level at 99.0, allowing the index to move towards the mid-97s. We saw a similar situation in December 2023, where the index declined by 2% before stabilizing in the new year. Weekly price trends confirm this downward momentum, suggesting traders should avoid buying into this dip. For derivative traders, this situation suggests preparing for a weaker dollar. Buying January 2026 put options on dollar-tracking ETFs like the UUP could provide good exposure to the expected decline. Alternatively, traders might consider buying call options on currencies likely to benefit, such as the Euro or British Pound, using EUR/USD or GBP/USD contracts. Those engaged in futures markets may want to short the March 2026 Dollar Index futures contract, using any brief rallies up to the 98.50 level as entry points. This is also a vital time for businesses with dollar-denominated earnings to hedge their currency exposure for Q1 2026. They can use forward contracts or options to lock in current exchange rates and protect profits from expected dollar weakness. Create your live VT Markets account and start trading now.

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