The week that was
This week, the US Dollar (USD) decisively moved higher, leaving behind the previous week’s inconclusive price action. The US Dollar Index (DXY) reached new four-month highs around 99.70, potentially leading to a visit to the psychological 100.00 barrier sooner than expected.
This week was all about geopolitics, with the Greenback gaining strong momentum in response to the flight-to-safety environment following the US and Israel attacks on Iran over the weekend and the rapid escalation and deterioration of the geopolitical landscape that ensued.
The equally strong rebound in US Treasury yields across the curve also underscored the sharp advance in the Greenback, as speculation over the likelihood of a pick-up in inflation, exclusively driven by higher energy costs, prompted market participants to start trimming rate cut bets by the Federal Reserve (Fed) in the upcoming months.
Fed on hold, confidence building
The Federal Reserve (Fed) did exactly what markets expected in January, leaving rates unchanged at 3.50% to 3.75%. The decision itself was no surprise, but the tone was slightly more relaxed.
Policymakers sounded more comfortable with the backdrop. Growth appears steadier; the labour market is no longer deteriorating, and service inflation continues to ease gradually. Chair Jerome Powell said policy is in a good place, brushing off the recent uptick in headline inflation as largely tariff-related noise.
The Minutes reinforced that message. Most officials were comfortable holding steady, with only a couple favouring a cut. Rate reductions remain possible if inflation continues to cool, but for now the Fed is simply watching the data and moving meeting by meeting.
Fed officials signal diverging views on rate cuts
Latest comments from Fed officials highlight the lack of consensus when it comes to the policy outlook. Indeed, some policymakers believe rate cuts remain appropriate if inflation keeps cooling, while others remain more cautious. In addition, the current Middle East crisis has also added fresh uncertainty to the policy debate.
John Williams (New York, permanent voter) said the economy remains on a solid footing and that rate cuts remain possible if inflation moderates as expected. He sees growth around 2.5% this year, supported by fiscal stimulus, favourable financial conditions, and a strong investment in artificial intelligence. Williams added that tariffs have been a key driver of inflation recently but expects their impact to fade by midyear, allowing inflation measured by the Personal Consumption Expenditures Price Index (PCE) to move gradually back toward the bank’s 2% target.
Jeffrey Schmid (Kansas City, 2028 voter) pushed back against the idea of further easing. In his view, inflation remains too high, and demand continues to outpace supply, particularly in services. After nearly five years of above-target inflation, he warned the Fed cannot afford complacency.
Neel Kashkari (Minneapolis, voter) said the Iran conflict has increased uncertainty around the outlook. While he previously expected one rate cut this year, he now prefers to wait and see how the data respond to geopolitical developments.
Beth Hammack (Cleveland, voter) also urged patience. She said it is too early to assess the economic impact of the Iran conflict and argued rates may need to stay unchanged for quite some time while inflation remains above target.
Stephen Miran (FOMC Governor, permanent voter) took a more dovish stance. As usual, he advocated for several rate cuts this year, arguing that higher oil prices may lift headline inflation but historically have had a limited impact on core inflation.
Tom Barkin (Richmond, 2027 voter) said that the Fed’s decision-making process might be clouded by the possibility of both inflationary pressures and a slowing economy.
Mary Daly (San Francisco Fed, 2027 voter) also highlighted two-sided risks. While a softer jobs report raises concerns about the labour market, she said the Fed should not rush rate cuts, given persistent inflation and rising oil prices.
Bottom line
The Fed remains divided. Some policymakers see scope for cuts if inflation cools, while others argue price pressures remain too strong. With geopolitics adding uncertainty, the Fed’s path remains firmly data dependent.
Inflation is back!
The US started the year with somewhat lower inflation. Indeed, the Consumer Price Index (CPI) rose by 2.4% YoY in January, while the core print came in at 2.5% from a year earlier. It seems that price pressures are going in the right direction, although they remain above the Fed’s goal of 2%.
That was enough for the markets to keep the disinflation story going and slowly raise hopes for rate reduction in the future. But for the Fed, this seems more like progress than triumph, particularly because the full effect of tariffs on consumer prices is still not known.
That said, the Personal Consumption Expenditures (PCE), the Fed’s preferred gauge, also has a warning, after the December reading was higher than previously estimated, which means that the number for January may not be as encouraging as the CPI data suggests.
In light of the current crisis in the Middle East, higher oil costs might make things more difficult. Fuel and transportation costs typically increase quickly when the price of crude oil rises, and if tensions in the Middle East stay high, the effects of inflation may become more obvious in the coming months.
US Dollar positioning: bearish tilt returns, but with low conviction
The latest Commodity Futures Trading Commission (CFTC) data show speculators moved back into negative territory in the week to February 24, with net shorts widening to around 1.8K contracts. That effectively reverses the previous week’s modest net long and points to a slight bearish tilt on the US Dollar.
That said, the scale of the move remains small by historical standards. This looks less like a strong bet against the Greenback and more like a cautious repositioning away from it.
Another signal comes from open interest, which fell for a fourth straight week to around 26.2K contracts. That decline suggests overall participation in the USD positioning remains thin.
In summary, the market is somewhat against the USD, but there isn’t much confidence. With limited positioning, it wouldn’t take much to have the market move more sharply, like better US data or a more hawkish Fed story.
What’s next for the US Dollar
Next week feels like one that could matter for US markets, particularly regarding inflation.
That said, front and centre is the monthly CPI for February, seconded by the January PCE.
Beyond the data, the Fed speakers will be dramatically reduced to a couple of speeches by the Vice Chair of Supervision, Michelle Bowman, in light of the usual blackout period ahead of the March 18 meeting.
What techs are saying
In the daily chart, the US Dollar Index (DXY) trades at 98.96. The near-term bias is modestly bullish as price holds above the 55- and 100-day Simple Moving Averages (SMAs) near 98.0 and 98.6, while the 200-day SMA around 98.3 flattens just below spot and reinforces a nascent floor. The Relative Strength Index (RSI) at 63 signals positive momentum without overbought conditions, and the rising Average Directional Index (ADX) back toward the mid-20s suggests trend strength is rebuilding after a prior consolidation phase.
Immediate resistance emerges at 99.68, with a daily close above this level opening the path toward 100.39 and then 101.98. On the downside, initial support is expected around the 200-day SMA near 98.30, ahead of the horizontal level at 95.56, while deeper pullbacks would expose 95.14 and 94.63. As long as the index defends the cluster of moving averages above 98.00, dips are more likely to be absorbed within a developing bullish continuation phase.
(The technical analysis of this story was written with the help of an AI tool.)
Bottom line
It is worth remembering that the late January rally in the US Dollar was largely driven by stronger US data and a steadier message from the Fed. The move gained further traction when President Trump nominated Kevin Warsh as Jerome Powell’s successor, a choice markets interpreted as potentially less dovish than some had expected. This week, rising geopolitical tensions added another layer of support for the Greenback.
Looking ahead, geopolitics aside, investors will be keeping a close eye on the US data calendar, particularly inflation and labour market figures. Jobs remain one of the Fed’s key gauges of the economy’s health. Policymakers are alert to signs of a slowdown, but they are equally aware that inflation has not yet comfortably returned to the 2% target.
Price pressures are still a little too high for comfort. If the disinflation trend begins to stall, markets could quickly dial back expectations for early or aggressive rate cuts. In that case, the Fed would likely lean more heavily on patience, a steadier tone that could gradually offer the Dollar renewed support.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
