US Dollar in whipsaw move as traders assess German election results

• The US Dollar is red across the board against most major currencies on Monday. 
• The far-right AfD party cannot book enough seats to claim the lead in Germany. 
• The US Dollar Index (DXY) recovers initial losses and looks ready to shoot higher. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, recovers the nearly 0.50% loss it incurred in the opening hours in the Asian markets and trades flat near 106.60 at the time of writing on Monday. The initial move down in the US Dollar came in due to euphoria for the Euro (EUR) after the first German election results showed a firm lead for the Christian Democratic Union of Germany (CDU), which will take the lead in forming a coalition. As the dust settles, this means that fundamentally, no big changes will take place in Germany regarding leadership and political agenda, which triggers the Euro to pare back gains and the DXY to turn flat to positive. 

The US economic calendar starts off the week slowly, with all eyes on the US Gross Domestic Product (GDP) release for the fourth quarter of 2024 on Thursday and Personal Consumption Expenditures (PCE) for January on Friday. However, the Chicago Fed National Activity Index for January is due this Monday. Later in the day, United States (US) President Donald Trump is also due to deliver a speech. 

Daily digest market movers: That was quick

• Halfway through the European trading session, the Euro (EUR) has given up nearly all its gains against the US Dollar (USD) as traders are not impressed with the possible lack of major reforms or changes in the German political landscape for the new government formation.
• At 13:30 GMT, the Chicago Fed National Activity Index for January is due. No forecast is available, with the previous reading at 0.15.
• The US Treasury will auction a 3-month, 6-month Bills, and a 2-year Note auction this Monday.
• US President Donald Trump is set to hold a press conference with President of France Macron near 19:00 GMT. 
• Equities are breathing a sigh of relief after the German election outcome, though the German Dax is starting to fade its intraday gains halfway through the European trading session. 
• The CME FedWatch tool shows a 41.2% chance that interest rates will remain unchanged at current levels in June against a bigger 46.2% for a 25 basis points (bps) rate cut. 
• The US 10-year yield trades around 4.43%, down over 3% from last week's high at 4.574%.

US Dollar Index Technical Analysis: False note

The US Dollar Index (DXY) portrays a textbook element here, with the German election outcome as a catalyst. During the Asian session, a sigh of relief and support for the Euro was outpacing the Greenback in the idea that a crisis was averted with the Far-Right not having enough seats to secure the lead in Germany. However, now that the dust settles, markets start to realise that the current coalition probability is dull and the same politics markets saw in the past few decades is due, which is seen as not enough to trigger substantial additional upside in Euro.

On the upside, the 100-day Simple Moving Average (SMA) could limit bulls buying the Greenback near 106.61. From there, the next leg could go up to 107.35, a pivotal support from December 2024 and January 2025. In case US President Trump has some surprise comments on Monday, even 107.96 (55-day SMA) could be tested. 

On the downside, the 106.52 (April 16, 2024, high) level has seen a false break for now. However, that does mean quite a few stops might have been triggered in the markets, with a few bulls having been washed out of their long US Dollar positions. Another leg lower might be needed to entice those Dollar bulls to reenter at lower levels, near 105.89 or even 105.33.

US Dollar Index: Daily Chart