US Dollar softens after Trump administration tries to circumvent inflationary shock

• The US Dollar retraces after sources disclosed the Trump administration is considering a gradual tariff implementation. 
• In early Tuesday trading, a knee-jerk reaction briefly pushed inflation and Fed policy concerns to the background. 
• The US Dollar Index (DXY) dips below 110.00 and looks for support to bounce back. 

The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, edges lower and dips below 110.00 on Tuesday, extending the previous day's retracement from an over-two-year high of 110.18. The main driver comes after sources in the upcoming President-elect Donald Trump administration disclosed that they are considering a very slow month-to-month implementation of tariffs to avoid an inflationary shock, Bloomberg reported. A second driver comes from headlines of a ceasefire deal brokered by the US between Hamas and Israel, which is supported by both the current US President Joe Biden and President-elect Donald Trump. 

The US economic calendar picks up in importance on Tuesday, with the Producer Price Index (PPI) release as an appetizer for the more important Consumer Price Index (CPI) on Wednesday. Overall expectations are that the monthly gauges should soften or stay relatively stable while the year-on-year benchmarks will head higher compared to previous readings. 

Daily digest market movers: Starting to thicken 

• At 13:30 GMT, the Producer Price Index (PPI) for December is released:
  • The monthly core PPI gauge is expected to increase 0.3% compared to 0.2% in November.
  • The monthly headline PPI is expected to increase by 0.3%, coming from 0.4% in the previous month.
  • The yearly headline PPI is expected to increase 3.4% from 3.0% in November, while the annual core PPI is expected to increase 3.8% from 3.4% in the previous month.
• At 15:00 GMT, Federal Reserve Bank of Kansas City President Jeff Schmid delivers a speech about the US economic and monetary policy outlook at an event organized by The Central Exchange.
• At 20:05 GMT, Federal Reserve Bank of New York President John Williams delivers open remarks at the "An Economy That Works for All: Housing Affordability" event organized by the New York Fed in New York.
• Chinese equities are rallying higher on the back of the rumors of gradual tariff implementation. European equities and US futures are taking over the positive sentiment, with all major indices in the green on the day. 
• The CME FedWatch Tool projects a 97.3% chance that interest rates will be kept unchanged at current levels in the January meeting. Expectations are for the Federal Reserve (Fed) to remain data-dependent with uncertainties that could influence the inflation path once President-elect Donald Trump takes office on January 20.
• US yields are softening substantially. The 10-year benchmark trades around  4.753% at the time of writing on Tuesday, fading from its fresh 14-month high of 4.802% seen on Monday.

US Dollar Index Technical Analysis: This will be the new normal

The US Dollar Index (DXY) is set to see volatility pick up. The constant deliverance of statements from President-elect Donald Trump, followed by comments from sources inside his team, will deliver several knee-jerk moments and reactions. This means that sense of direction could get distorted and misty from now on. 

On the upside, the 110.00 psychological level remains the key resistance to beat. Further up, the next big upside level to hit before advancing any further remains at 110.79. Once beyond there, it is quite a stretch to 113.91, the double top from October 2022.

Looking down, the DXY will look for a bounce off the green ascending trend line from December 2023, which currently comes in around 109.00 as nearby support. In case of more downside, the next support is 107.35. The next level that might halt any selling pressure is 106.52, with the 55-day Simple Moving Average (SMA) at 106.92 reinforcing ahead of this region of support. 

US Dollar Index: Daily Chart