The U.S. dollar index (DXY), a weighted index of the value of the U.S. dollar relative to a basket of six major currencies, was bouncing around the 97.61 support level before heading down 0.39% to close at 97.55 on Friday, after the U.S. Commerce Department reported a mixed bag of retail sales data. Overall retail sales showed a 0.2% rise month-over-month in November, missing the 0.3% increase forecast by economists polled by Reuters. The October data were kept unrevised, while September sales were revised to a 0.1% decrease. The so-called core retail sales, excluding automobiles, gasoline, building materials and food services, came in at a 0.6% increase, better than the expectations of a 0.4% rise. 

Earlier in the week, the dollar began losing ground against the yen after the Cabinet Office of Japan said on Tuesday that it revised Japan’s third-quarter gross domestic product (GDP) to an annualized growth of 1.0% from a 0.8% fall, reported in the initial estimate last month. The upward revision of the second estimate GDP, which far exceeded the analysts’ forecasts for a 0.1% rise, means Japan wouldn’t fall into a technical recession in the third-quarter. 

The Cabinet Office of Japan also reported on Wednesday that core machinery orders, excluding those volatile orders from electric power companies and those for ships, unexpectedly increased 10.70% in October over the previous month, the second straight month of a rise. The economists surveyed by The Wall Street Journal and the Nikkei expected the orders to drop 1.5%. For the week, the strong yen drove down the USD/JPY exchange rate 1.88%, to close on Friday at 120.85 yen per dollar. 

The dollar has been under selling pressure against the euro, down 4.25% since last Wednesday, after the European Central Bank (ECB) announced at the Governing Council meeting in Frankfurt that they would cut the overnight deposit rate to minus 0.3% from minus 0.2%, and leave its key lending rate unchanged at 0.05%, while extending purchases of government bonds and other assets from the September 2016 target date through at least March 2017. 

The ECB move was below market expectations, as it had expected the ECB to drop the overnight rate to minus 0.4% and the key lending rate to zero from 0.05%, and to expand the 1.1 trillion euro bond-buying program by 360 billion euros.

Ewald Nowotny, president of the National Bank of Austria and member of the ECB’s governing council, came out on Wednesday to defend last week’s ECB monetary decision and told reporters in Vienna that, “It was absurd what expectations were expressed,” … “I believe it was really a massive failing of market analysts. I don’t believe the ECB’s communications policy gave a false signal.” Nowotny’s remarks sent the euro surging 1.24% on Wednesday against the dollar, as currency markets interpreted that as additional quantitative easing is unlikely.

ECB officials have been sending mixed messages, as ECB President Mario Draghi delivered a less-hawkish speech at the Economic Club of New York last Friday afternoon, saying that, "there is no particular limit to how we can deploy any of our tools.", meaning the ECB could step up their stimulus efforts if necessary.

Goldman Sachs is now backtracking on their call for euro-dollar parity. According to The Wall Street Journal, Goldman’s chief FX strategist Robin Brooks wrote in a note on Monday that the bank now sees the euro at $1.07, $1.05 and $1 in three, six and 12 months, respectively. Previous forecasts for those time horizons had been $1.02, $1 and $0.95. For the week, the EUR/USD exchange rate jumped 1.03%, to close at 1.0986 dollars per euro on Friday. Goldman Sachs had said in March that the euro would hit parity with the dollar by September.

Before the release of Friday's U.S. retail sales data, the Fed committee, including Federal Reserve Chair Janet Yellen, was convinced that they are ready to raise rates at the FOMC meeting next week, despite the mixed bag of U.S. economic data of late, and an industrial sector that is already heading into a technical recession. In her speech delivered at the Economic Club in Washington last Wednesday, Yellen laid the groundwork for an interest rate liftoff as she put it, “Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability,”.

The probability of a rate hike at the Fed’s FOMC meeting on December 15-16 based on the 30-day prices of federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, jumped to 81% from 79% from the previous week, according to data from the CME Group as of December 11. 

Technically, the DXY has broken down the bearish ascending (ASC) wedge chart pattern, with a projected target of 94.49. A Fed rate hike could already be priced in, as the Fed funds futures contracts show less than 20% probability for no Fed rate hike. Therefore, no upside move is expected until the rate decision is announced. The tone of the Fed’s policy statement, either dovish or hawkish, could spark a big move in the DXY. The market is expecting a “one-and-done” rate hike event, for a considerable length of time.

More downside risk for the dollar could be coming from the People’s Bank of China (PboC), as the bank set the daily reference at 6.4358 yuan to a dollar on Friday, the lowest since August 5, 2011, according to the PBoC’s China Foreign Exchange Trade System. Since China stunned financial markets by devaluing the yuan in August, the PBoC move would be to sell dollars to support the yuan. Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp, told Bloomberg News that he hasn’t seen any decisive intervention this week, but they may come back in after next week’s FOMC meeting.