The US Dollar (USD) continued to drift lower as US data overnight was largely within expectations. DXY was last at 106.35, OCBC’s FX analysts Frances Cheung and Christopher Wong note.

FX markets may still trade cautious on tariff threats

“Daily momentum turned mild bearish while RSI fell. Bearish divergence on daily MACD, RSI observed. Downside play remains likely. Support here at 106.20, 105.40/80 levels (21 DMA, 38.2% fibo). Resistance at 107.20, 108.10 (recent high). Price action continues to show that USD bull momentum is feeling fatigue, and the highs seen last week lacked follow through.”

“Stretched USD valuation, technical signals and potential December seasonality effect (DXY fell in 8 out of the last 10 Decembers) are some considerations for profit-taking on USD longs in the near term. We may need to see a flush out of USD longs before USD can resume its rise (at some point later). There is no US data for released today and Fri due to Thanksgiving Day holidays. As such, razor thin market liquidity may exacerbate choppy moves in FX market on any catalyst.”

“On tariffs, USD/MXN rose sharply earlier this week in response to Trump’s comment for 25% tariff on Mexico but subsequently, Trump said he had a very productive conversation with Mexican President Claudia Sheinbaum. The Mexican episode shows that Trump's tariff threat was likely a bargaining chip to unlock other policy agenda, which in this case appears to be migration, drugs. This reinforces the case that tariff threat may not be about the timing of implementation or by how much but whether it is intended to achieve other purposes. Nevertheless, FX markets may still trade cautious on tariff threats until we get greater clarity on policy objectives.”