**US Dollar Weekly Outlook: Limited Downside Despite Mild Setbacks**
*Adapted and expanded from the analysis by Matías Salord, FXStreet*
The United States dollar (USD) has shown signs of weakness following its recent climb, prompting traders and investors to assess whether the world’s reserve currency is primed for a deeper, sustained sell-off or simply undergoing a temporary correction. As broader macroeconomic and monetary policy dynamics remain at the forefront, it is essential to thoroughly evaluate the US dollar’s underlying drivers and potential trajectories. This analysis explores the current landscape for the greenback, drawing both from Matías Salord’s insights and additional financial commentary.
## Current Fundamentals and Currency Movements
After registering multi-week highs earlier in 2024, the US dollar has experienced moderate selling pressure against major counterparts, dragged lower by evolving expectations around Federal Reserve monetary policy. Key factors at play include:
– **Shifting US interest rate expectations**: The Federal Reserve’s path for policy normalization remains front and center for forex markets. The prospect of rate cuts later in the year has grown, but the timing remains contentious.
– **Global macro data**: Economic strength or fragility across the Eurozone, the United Kingdom, China, and other regions continues to affect relative currency flows and risk sentiment.
– **Geopolitical risks**: Persistent global tensions and their economic ramifications periodically result in defensive flows into or out of the dollar.
Despite recent weakness, it is important to note that there is not yet compelling evidence for a full-fledged, protracted reversal lower in the dollar.
## Federal Reserve Policy: The Principal Driver
The Federal Reserve’s next moves are arguably the most significant contributors to the near-term and medium-term outlook for the USD. Over the past several months, the following themes have dominated market narratives:
– **Stubborn inflation**: While inflation has moderated from its peak, price pressures remain somewhat sticky. This complicates the timing and magnitude of Fed easing.
– **Economic resilience**: US labor markets have proven robust, and key consumption indicators generally signal ongoing economic strength. This resilience offers the Federal Reserve flexibility, and lessens urgency for rate cuts.
– **Fed member commentary**: Policymaker speeches and official guidance have emphasized a ‘data dependent’ approach, with FOMC members making it clear that while rate cuts are plausible in 2024, there is no preset timetable.
Market-based measures, such as CME FedWatch and interest-rate futures, have seen expectations for mid-2024 Fed cuts soften in recent weeks, which has at times offered the dollar a degree of support, even as other economic developments have undermined its position.
## Dollar Index (DXY) and Technical Backdrop
The US Dollar Index, which measures the greenback against a basket of major currencies, recently pulled back from multi-month highs near 105.00, retracing toward the 104.00 region. The following technical elements merit consideration:
– **Support and resistance
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