By Rania Gule, Senior Market Analyst at XS.com – MENA
The US Dollar Index is hovering near the 96.50 level in Wednesday’s trading, posting a slight decline during the Asian session followed by the early European hours, clearly reflecting the cautious anticipation dominating markets ahead of the delayed January Nonfarm Payrolls report. In my view, this pullback does not signal sharp weakness as much as it represents prudent repositioning by investors following disappointing retail sales data. The market is not reacting to a single figure; rather, it is repricing the likely trajectory of US monetary policy. This makes the current moves closer to a phase of “strategic waiting” than to a structured bearish wave.
Data released by the US Census Bureau showed that retail sales remained unchanged at $735 billion in December, compared to a 0.6% increase in November and below market expectations for a 0.4% rise. On an annual basis, growth slowed to 2.4% from 3.3% in the previous month. In my opinion, these figures carry implications beyond a temporary slowdown in consumption; they point to early signs of cooling in one of the most critical engines of the US economy—consumer spending, which forms the backbone of growth. When consumption slows in this manner, it either reflects pressure on purchasing power or increased consumer caution, both of which open the door to broader economic deceleration if the same trend persists through the first quarter.
The dollar’s reaction to these figures was logical, as the weaker reading strengthened expectations that the Federal Reserve may cut interest rates this year. From my perspective, markets are not necessarily awaiting an immediate move, but rather a clear shift in the Fed’s tone from tightening to easing. Any indication that the slowdown in consumption could spread to other sectors would push investors to price in rate cuts sooner than previously anticipated, naturally pressuring US Treasury yields and reducing the dollar’s appeal. Therefore, I see the 96.50 level not merely as a technical figure, but as a current equilibrium point between expectations of monetary easing and concerns about economic slowdown.
However, the picture remains incomplete without the Nonfarm Payrolls report, which commands full attention today. Market estimates point to around 70,000 jobs added in January, with the unemployment rate holding steady at 4.4%. In my assessment, if realized, this figure would reflect noticeable moderation compared to prior averages, but it would not be sufficient to trigger genuine alarm as long as unemployment remains stable. Markets will scrutinize the details, particularly wage growth and average working hours, as any inflationary pressures stemming from wages could complicate the Fed’s calculations and limit its ability to ease policy quickly.
I believe the most impactful scenario for the dollar would be a strong upside surprise in jobs—exceeding, for example, 120,000—combined with a slight drop in unemployment. In such a case, we could see a swift rebound in the Dollar Index toward 97.00 and potentially higher, as this would reduce bets on near-term rate cuts. Conversely, if the data comes in below 50,000 jobs or is accompanied by a rise in unemployment, I expect selling pressure on the dollar to accelerate, with a clear break below 96.30 paving the way for testing lower levels in the weeks ahead.
The market is seeking a slowdown sufficient to justify monetary easing, but without tipping into an actual recession. In my view, this balance is extremely delicate, because any sharp deceleration would weigh on global risk appetite, potentially supporting the dollar as a safe haven even if yields decline. Here lies the paradox: the dollar may weaken on expectations of rate cuts, yet find support if recession fears dominate globally.
Based on this outlook, I expect the Dollar Index to remain within a short-term range between 96.00 and 97.20 until greater clarity emerges regarding the Fed’s path in upcoming meetings. I do not currently see justification for a sharp and sustained decline, as the US economy—despite slowing—still demonstrates relative resilience compared to other major economies. At the same time, I believe any upside will remain limited unless we witness clear improvement in macroeconomic data, particularly in consumption and the labor market.
In conclusion, what we are witnessing is not merely a temporary corrective move, but a broader repricing phase of US monetary policy expectations. The stagnation in retail sales served as an early warning signal, and the jobs report will determine whether this signal reflects temporary moderation or the beginning of a weaker cycle. I lean toward a moderate slowdown scenario that prompts the Fed to implement gradual and measured rate cuts, implying that the dollar may remain under relative pressure during the first half of the year without experiencing a sharp collapse. In all cases, I believe risk management and flexibility in positioning will be decisive for investors navigating this delicate stage of the economic cycle.