The US Dollar is rising against most major currencies, with the Dollar Index nearing its 200-day moving average. A breakthrough here could boost momentum, but predictions indicate any gains may be short-lived. Recent data supports an expected 50 basis point interest rate cut by 2026. In December, ADP private payroll growth was lower than expected, adding only 41,000 jobs. The growth mainly came from the education and health services sectors, hinting at a potential slowdown in the labor market. The JOLTS report for November also shows decreased labor demand, with fewer hiring and job openings.

ISM Services Index Update

The ISM services index for December reflected strong activity in the sector, while price pressures eased. The index reached 54.4, exceeding forecasts, and new orders hit their highest level since September 2022. Employment rates increased, and Prices Paid fell to the lowest in nine months. An increase in productivity, driven by AI, could support the USD’s strength by allowing the Fed to keep its policies tight for longer. Higher productivity can boost growth potential without raising inflation. The expected Q3 non-farm productivity data is a growth estimate of 5.0% SAAR, much higher than the long-term average. The Dollar Index is approaching a key resistance level, nearing its 200-day moving average of around 103.85, which might limit the recent rally. A clear break above this point would suggest further gains for the dollar in the coming weeks. Yesterday’s weak ADP payrolls data of +41k confirms the cooling labor market trend seen in late 2025. This supports the market’s current pricing, showing a high likelihood of 50 basis points in rate cuts this year according to CME FedWatch data. Consequently, any dollar strength should be seen as an opportunity to sell.

Services Sector Update

Despite this, the services sector remains robust, with the ISM New Orders index reaching its highest point since September 2022. Importantly, the Prices Paid component fell, indicating disinflation even in a strong environment. This complicates the narrative for a straightforward, dovish Fed pivot. The biggest risk to a weaker dollar is a potential surge in AI-driven productivity, which could enable the Fed to maintain high rates without fueling inflation. Today’s Q3 2025 productivity data is expected to be an impressive 5.0%, significantly above the 1.3% average from 2007 to 2019. Such a high figure could alter the outlook and support renewed dollar strength. With these mixed signals, traders should consider strategies that could benefit from significant price movements, rather than predicting a direction. The upcoming productivity report is a clear catalyst for volatility, making options straddles or strangles on dollar-related instruments attractive for capitalizing on a breakout, whether from a productivity surprise or a confirmation of the labor market slowdown. Create your live VT Markets account and start trading now.

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