The US Dollar is gaining against most major currencies, with the Dollar Index closing in on the 200-day moving average. A breakthrough could increase momentum, although predictions suggest that any rallies may be brief and limited. Recent data aligns with expectations for a 50bps interest rate decrease by 2026.
ADP private payroll growth was below expectations in December, recording an increase of 41,000 jobs, largely due to the non-cyclical education and health services sectors. This shift hints at a potential slowdown in the labour market. The JOLTS report for November further signals decreasing labour demand, as hiring and opening rates fall.
ISM Services Index Update
The ISM services index for December showed robust sector activity while price pressures reduced. The index was at 54.4, surpassing forecasts, with new orders reaching their highest since September 2022. Employment rates have expanded, while Prices Paid fell to the lowest in nine months.
An AI-driven boost in productivity could prolong USD strength by enabling the Fed to maintain restrictive policies longer. Increased productivity raises growth potential without igniting inflation. US Q3 non-farm productivity data is anticipated to show a growth of 5.0% SAAR, well above the long-term average.
The Dollar Index is testing a critical resistance level. We see it closing in on its 200-day moving average, currently around 103.85, which could cap the recent rally. A decisive break above this level would signal further upside momentum for the dollar in the coming weeks.
Yesterday’s weak ADP private payrolls data of +41k confirms the cooling labor market trend we observed in late 2025. This supports the market’s current pricing, which, according to CME FedWatch data, shows a high probability of 50 basis points in rate cuts this year. Such a policy path suggests any dollar strength should be viewed as a selling opportunity.
Services Sector Update
However, the services sector remains strong, with the ISM New Orders index hitting its highest level since September 2022. More importantly, the Prices Paid component fell, showing disinflation even amid solid activity. This complicates the narrative for a simple, dovish Fed pivot.
The biggest risk to a weaker dollar is the potential for an AI-driven productivity boom, which would allow the Fed to keep rates high without stoking inflation. Today’s Q3 2025 productivity data is expected at a very strong 5.0%, far above the 1.3% average we saw between 2007 and 2019. A number this high would fundamentally change the outlook and support renewed dollar strength.
Given these conflicting signals, traders should consider strategies that benefit from a large price swing rather than a specific direction. The upcoming productivity report is a clear catalyst for volatility, making options straddles or strangles on dollar-related instruments attractive. This approach allows capitalizing on a breakout, whether it is driven by a productivity surprise or a confirmation of the labor market slowdown.
