The US Dollar Index (DXY), which tracks the US Dollar (USD) against a basket of six major currencies, is trading largely unchanged around the 98.00 level during early European hours on Monday. Trading activity remains subdued as market participants brace for the New Year holiday, resulting in thin liquidity conditions. Later in the session, investors will turn their attention to the US Pending Home Sales data for November.
Fed rate cuts weigh on the US Dollar outlook
At its December policy meeting, the US Federal Reserve (Fed) lowered the federal funds rate by 25 basis points, bringing the target range to 3.50%–3.75%. This move marked a cumulative 75 bps of rate cuts delivered by the Fed in 2025. With signs of a cooling labor market and easing inflation pressures, markets are now pricing in at least two additional rate cuts in 2026, a factor that could continue to weigh on the US Dollar against its major peers.
According to the CME FedWatch tool, financial markets are assigning an approximately 18.3% probability to a further rate reduction at the Fed’s next policy meeting in January.
Fed independence concerns and geopolitical risks in focus
Adding to the uncertainty, US President Donald Trump stated last week that he expects the next Fed chair to lower interest rates if financial markets perform well. These remarks have reignited concerns among investors and policymakers over the independence of the central bank, potentially exerting further downside pressure on the DXY.
On the other hand, persistent geopolitical risks could underpin demand for the US Dollar as a safe-haven asset. Trump said on Sunday that “a lot of progress” had been made in discussions with Ukrainian President Volodymyr Zelenskiy regarding a possible peace agreement. However, he cautioned that finalizing such a deal could take several weeks and that no fixed timeline has been established.
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