The U.S. Dollar Index (DXY) is trading with a modest recovery at 101.55 points on the first trading day of the year, as markets price in the possibility of substantial cuts to federal interest rates in 2024.

Markets are eagerly awaiting the release of various economic data this week to gather insights into the Federal Reserve’s next moves.

Looking at the dollar’s performance over the past year, it has lost approximately 3% since the beginning of the year. Examining the chart of the U.S. Dollar Index (DXY) since its opening in January, it seems that the main driver for 2024 is whether the markets will continue to price in federal interest rate cuts or if the Federal Reserve has lost control and made a policy mistake.

The answer may lie in short-term trading and profit-taking with the release of Non-Manufacturing Purchasing Managers’ Index (PMI) data on Friday, especially after recent unemployment claims data sparked a tangible shift in the dollar index.

If the PMI data on Friday remains above 50 and exceeds expectations, the dollar may recover some previous losses from this week and rise to test key resistance levels. It becomes apparent that the markets may not continue pricing in interest rate cuts, especially if surprises emerge in the U.S. economic agenda.

The cautious stance taken by the Federal Reserve, welcoming a slowdown in inflation figures, ruling out interest rate hikes in 2024, and anticipating 75 basis points easing, has recently led to increased demand for the U.S. dollar against riskier assets.

Currently, the market anticipates a rate cut in March with additional adjustments in May. The accuracy of these expectations will be revealed next week as the United States releases key labor market data, helping investors form expectations about the next moves by the Federal Reserve. This will be the main driver for the direction of the dollar index.

Entering 2024, the weak position of the dollar reflects mixed sentiments in the markets, balancing between expected shifts in Federal Reserve policy and global economic movements.

Investors will continue to monitor central bank actions and the global economic landscape, signaling a period of cautious optimism and the potential resurgence of currency markets against the dollar in the medium and long term.