US Dollar (USD) is up against most major currencies, with the Dollar Index (DXY) closing in on its next resistance level at the 200-day moving average. A break above would add upside momentum. However, relative monetary policy indicates that technical-driven rallies in USD should be brief and shallow. Yesterday’s data supports Fed funds futures pricing 50bps of cuts in 2026, BBH FX analysts report.

AI-driven productivity could extend USD strength

"ADP private payrolls growth underwhelmed in December. ADP employment printed at +41k (consensus: +50k) vs. -32k in November driven in large part by gains in the non-cyclical education and health services (+39k). When the non-cyclical sector dominates job creation, it has historically signaled an impending labor market slowdown. Indeed, the November JOLTS report added to signs of weakening labor demand. Both the hiring and opening rates dipped to last year’s low."

"The December ISM services index remained indicative of solid services sector activity, but price pressures eased further. The headline index overshot expectation at 54.4 (consensus: 52.2) vs. 52.6 in November and sub-indexes were good. New Orders surged to 57.9 (consensus: 52.6, prior: 52.9), highest level since September 2022, Employment is back into expansion territory for the first time since May 2025, and Prices Paid dropped to a nine-month low at 64.3 vs. 65.4 in November."

"An AI-driven productivity boom is the biggest upside risk for USD as it would allow the Fed to keep policy restrictive for longer. Faster productivity raises potential growth rate, supporting stronger economic activity without triggering inflation. US Q3 non-farm productivity data is due today (1:30pm London, 8:30am New York). Productivity (GDP/hours worked) is expected at 5.0% SAAR vs. 3.3% in Q2, which would be well above the post-war annual average of 2.1%."