US Dollar Forecast: DXY Faces Retracement Resistance as Shutdown Fears and Fed Uncertainty Grow

Published: February 04, 2026

Key Points

• The US Dollar Index (DXY) has completed a 50% retracement, indicating potential rangebound trading as fears of a government shutdown weigh on market sentiment.
• Concerns over de-dollarization led to initial selling pressure, but uncertainty regarding the Federal Reserve's rate-cut timing resulted in a sharp rebound.
• Market conviction is hindered by uncertainty surrounding Kevin Warsh's nomination as Fed Chairman, contributing to a tightening trading range.

Current Market Overview

The U.S. Dollar is currently flat against a basket of major currencies, trading at 97.383. After a volatile week that saw the DXY drop to a three-year low, the market has shown signs of recovery, suggesting a potential range formation as traders digest positive U.S. economic data and expectations of a less dovish Federal Reserve.

Market Dynamics

Last week, the dollar faced significant selling pressure due to renewed de-dollarization concerns. However, this trend reversed on January 27 when the Federal Reserve's communication regarding rate cuts failed to convince investors, leading to a rally that culminated in a 1.02% gain on Friday. This rally was fueled by a stronger-than-expected Producer Price Index (PPI) report and President Trump's nomination of Kevin Warsh for Fed Chairman.

Inflation Concerns

The PPI report indicated that U.S. producers raised prices at the highest rate in five months, likely due to import tariffs. This raises concerns that higher producer prices could translate into increased consumer prices, potentially leading to higher inflation in the upcoming Consumer Price Index (CPI) report. Such inflation could compel the Fed to maintain current interest rates for a longer period.

Fed Chair Powell's Insights

Fed Chair Jerome Powell suggested that tariff-related inflation might peak mid-year, indicating a shift in focus from labor market risks to price stability. This perspective aligns with the recent PPI data, reinforcing the Fed's cautious approach.

Uncertainty Surrounding Warsh's Nomination

The uncertainty regarding Warsh's nomination could lead to rangebound trading in the dollar market. Traders had anticipated two rate cuts in 2026, but the nomination has caused a pause in selling. With Powell's term ending in May and Warsh not taking office until June, the market is speculating that rate cuts may not occur until after Warsh's appointment.

Technical Analysis

From a technical standpoint, the DXY is in a downtrend, with the nearest swing top at 99.492, which is above both the 50-day and 200-day moving averages. The retracement zone between 97.522 and 97.987 has halted the recent rally, and trader reactions to this zone will likely dictate the short-term direction of the index.

Conclusion

In summary, while the DXY has shown signs of recovery, the market remains cautious due to uncertainties surrounding fiscal policy and the Federal Reserve's future actions. Traders are likely to remain vigilant as they await further clarity on these issues.