Hawkish Fed Outlook Supports Dollar Strength

Today’s markets analysis on behalf of George Pavel General Manager at Naga.com Middle East

4th January 2025

The U.S. dollar retreated slightly but remained near a two-year high, positioning itself for its strongest weekly performance in over a month, as market participants prepare for a potentially more hawkish Fed in 2025. A resilient labor market, as indicated by declining jobless claims, along with steady economic growth, has tempered expectations for aggressive rate cuts this year, further strengthening the greenback.

U.S. Treasury yields remained near their highs after rebounding for three months, with the 10-year note yield holding above 4.5%. Yields are likely to experience increased volatility in the coming weeks as both Trump’s inauguration and the Fed’s interest rate decision deadline approach. Ongoing inflation risks and a hawkish policy outlook could continue to support yields and the dollar’s rally.

Market attention is also on today’s ISM Manufacturing PMI. While the manufacturing sector is anticipated to remain in contraction, weaker-than-expected data could raise the likelihood of rate cuts aimed at supporting this key economic sector, potentially limiting the dollar’s significant further upside. Additionally, next week’s Eurozone PMIs could contribute to a stronger dollar, as a slowing European economy may prompt the European Central Bank to extend its rate-cutting cycle.