From two-year highs to a three-year low

2025 has seen a material decline in the fortunes of the greenback. A technical structure breakdown early in the year was followed by a breach of the 200-day moving average (MA) at the end of Q1. The index then entered correction territory, printing a three-year low at the end of Q2.

Since then, we have seen attempts to build a technical base, including a re-test of the end-of-June lows in mid-September. However, buying pressure has not been strong enough to push price back above the technically critical and psychologically important 100 level.

What the levels suggest from here

As things stand, the index remains more than 10% lower for 2025. On this technical view, the index may revisit the 96 area. However, technical levels can fail and outcomes depend on multiple factors.

US dollar index

The key question for 2026

The key question remains: are we likely to see further losses in the early part of next year and beyond, or will current support hold?

We cannot assess the US dollar in isolation and any outlook is shaped by internal and global factors, not least its relative strength versus other major currencies. Many of these drivers are interrelated, but four potential headwinds stand out for any US dollar recovery. Collectively, they may keep downside pressure in play.

Four headwinds for any US dollar recovery

1. The US dollar as a safe-haven trade

One scenario where US dollar support has historically been evident is during major global events, slowdowns and market shocks. However, the more muted response of the US dollar during risk-off episodes this year suggests a shift away from the historical norm, with fewer sustained US dollar rallies.

Instead, throughout 2025, some investors appeared to favour gold, and at other times, FX and even equities, rather than into the US dollar. If this change in behaviour persists through 2026, it could make recovery harder, even if global economic pressure builds over the year ahead.

2. US versus global trade

Trade policy is harder to measure objectively, and outcomes can be difficult to predict. That said, trade battles driven by tariffs on US imports are often viewed as an additional potential drag on the US dollar.

The impact may be twofold if additional strain is placed on the US economy through:

• a slowdown in global trade volumes as impacted countries seek alternative trade relationships, with supply chain distortions that may not favour US growth
  
• pressure on US corporate profit margins as tariffs lift costs for importers
  

3. Removal of quantitative tightening

The Fed formally halted its balance sheet reduction, quantitative tightening (QT), as of 1 December 2025, ending a program that shrank assets by roughly US$2.4 trillion since mid-2022.

Traditionally, ending QT is seen as marginally negative for the US dollar because it stops the withdrawal of liquidity, can ease global funding conditions, and may reduce the scarcity that can support dollar demand. Put simply, more dollars in the system can soften the currency’s support at the margin, although outcomes have varied historically and often depend on broader financial conditions.

4. Interest rate differential

Interest rate differential IRD is likely to be a primary driver of US dollar strength, or otherwise, in the months ahead. The latest FOMC meeting delivered the expected 0.25% cut, with attention on guidance for what may come next.

Even after a softer-than-expected CPI print, markets have been reluctant to price aggressive near-term easing. At the time of writing, less than a 20% chance of a January cut is priced in, and it may be March before we see the next move.

The Fed is balancing sticky inflation against a jobs market under pressure, with the headline rate back at levels last seen in 2012. The practical takeaway is that a more accommodative stance may add to downward pressure on the US dollar.

Current expectations imply around two rate cuts through 2026, with the potential for further easing beyond that, broadly consistent with the median projections shown in the chart below. These are forecasts rather than guarantees, and they can shift as economic data and policy guidance evolve.

As the final trading days of December approach, investors are assessing whether seasonal factors may again influence year-end price action.

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• The Santa Claus rally has delivered gains in 70 of the past 97 years, but history is no guarantee.
• Technology, retail, and consumer discretionary sectors have historically led with 1.9-2.1 per cent average gains during the Christmas period.
• Recent market rallies, AI weariness, and a hawkish Fed put doubts around the Santa Rally.

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The seven-day Santa rally window runs from 24 December through 5 January 2026.

This period has historically outperformed average market conditions, driven by holiday optimism, thin trading volumes, year-end bonus spending, tax-loss completions, and institutional portfolio rebalancing.

5 assets in focus this Christmas

1. Technology stocks

Technology stocks have historically been standout performers during the Santa rally period, averaging gains of 2.1 per cent across the seven-day window, although results vary significantly year to year.

The Nasdaq Composite typically posts stronger returns than broader indices, with an 82 per cent historical win rate for December-January performance.

However, tech stocks do currently face a challenging setup. The Nasdaq gained 19 per cent year-to-date (YTD) but has come under pressure in recent months, with AI-related stocks experiencing sentiment dips.

Key drivers:

• E-commerce momentum: Black Friday 2025 spending hit a record US$11.8 billion, with sustained demand through December as last-minute purchases drive revenue for Amazon and digital payment processors.
• Holiday infrastructure: Cloud computing, semiconductors, and digital payments capture the backend of holiday spending surges, benefiting from both retail transactions and year-end enterprise spending.‍
• Concentration risk: Five companies (Nvidia, Microsoft, Apple, Alphabet, Amazon) account for 30 per cent of major index returns. Down periods for these companies, as seen during recent AI-sentiment-driven volatility, could bring down the sector as a whole.

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Source: Statista

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2. Gold

Gold enters one of its strongest seasonal periods from mid-December through February, having posted gains every year since 2015 during this window. 

The gold price is maintaining strength throughout December despite the dollar's resilience, positioning well as the Christmas jewellery season peaks.

Key drivers:

• Seasonal jewellery demand: Approximately two-thirds of annual gold production flows into jewellery fabrication. Christmas, Lunar New Year (February 2026), and the Indian wedding season create regular buying patterns as merchants stock up in December.
• Dollar weakness patterns: December has historically been the dollar's weakest month, with negative bias from 22 December onwards. Gold's inverse correlation to the dollar could provide upside momentum during this period.
• Real yields environment: With the Fed cutting rates to 3.5-3.75 per cent while inflation remains around 3 per cent, real yields stay relatively low, potentially supporting higher gold valuations.‍
• Central bank accumulation: Continued central bank purchases and year-end institutional portfolio rebalancing could provide additional support.

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3. EUR/USD

December has historically been the most bullish month for EUR/USD, with the world's most-traded currency pair posting an average return of +1.2 per cent over the past 50 years. 

The US dollar regularly shows clear weakness during the Santa rally period, particularly from 22 December onwards. However, the Fed's hawkish rate cut has provided some dollar support this year.

Key drivers:

• Holiday liquidity dynamics: Lower institutional trading volumes during the holiday period reduce dollar support as retail traders and smaller participants dominate. Thin markets can amplify moves in either direction.
• Year-end rebalancing: European and Asian investors often repatriate funds or rebalance portfolios at year-end, creating demand for non-dollar currencies that typically support EUR and AUD against USD.‍
• Dollar strength from hawkish Fed: The Fed's December rate cut came with guidance of fewer cuts in 2026. This has kept the dollar elevated despite lower rates, possibly limiting the ability of EUR/USD seasonal patterns to influence the market.

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4. Retail stocks

Consumer discretionary and retail stocks historically outperform during the holiday period, with the sector averaging 1.9-2.1 per cent gains during the Santa rally window. Holiday shopping accounts for 30-40 per cent of annual retail revenue for many companies, making this period crucial for full-year performance.

Key drivers:

• Record holiday traffic: A record 202.9 million consumers shopped during the Thanksgiving-Cyber Monday weekend, up from 197 million in 2024. November spending surged 3.8 per cent year-over-year, with total holiday spending projected to exceed US$1 trillion for the first time.
• High-income shoppers trend: Value-oriented retailers (TJX, Five Below) and those with strong omnichannel presence are capturing a disproportionate share of value over retailers targeting low-middle income earners.
• Post-Fed tailwind: The December rate cut provides marginal relief through lower borrowing costs, potentially extending holiday spending into late December as credit becomes more accessible.

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5. Bitcoin

Bitcoin's December performance has been highly inconsistent, with a median return of -3.2 per cent, contrasting with traditional Santa rally patterns. Currently, Bitcoin is trading around US$87,500, down approximately 30 per cent from its October all-time high of US$126,210. 

However, there are signals that the historically volatile asset could see a Santa-led bounce this year.

Key drivers:

• Institutional infrastructure in place: More than US$120 billion is now held in spot Bitcoin ETFs, which provides a framework that could support capital flows if risk sentiment improves, although inflows are not assured.
• Pro-crypto policy expectations: Discussion around potential developments such as a US strategic Bitcoin reserve and the CLARITY Act could influence sentiment going into 2026, although outcomes remain uncertain.‍
• Four-year cycle inflection point: The recent sell-off came roughly 18 months after the most recent Bitcoin halving, a point linked to turning points in some past cycles, with the four-year narrative potentially influencing market behaviour.

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Risks to watch

• The December Fed meeting delivered a 25 basis point cut, but the hawkish tone has set expectations for fewer rate cuts in 2026.
• The Nasdaq's 19 per cent YTD gain has pushed valuations to elevated levels as AI-stock sentiment begins to dip. 
• Five companies account for 30 per cent of index returns, placing portfolio concentration at concerning levels.
• Reduced holiday liquidity amplifies both moves and risks. Thin trading volumes can create exaggerated reactions to headlines, particularly around geopolitical events or economic data.

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Is Santa coming to town?

The Santa Claus rally remains one of the better-known seasonal patterns in financial markets, but a historical hit rate of around 72 per cent also implies meaningful years where it does not play out.

A more balanced way to view the Santa rally window is as one input among many. 

Seasonal observations can be considered alongside technical levels, fundamental drivers, and risk management — particularly given how quickly sentiment can change in thin holiday conditions.

And, if you can, take time away from the screens and enjoy the break.

Every trader has had that moment where a seemingly perfect trade goes astray. 

You see a clean chart on the screen, showing a textbook candle pattern; it seems as though the market planets have aligned, and so you enthusiastically jump into your trade.

But before you even have time to indulge in a little self-praise at a job well done,  the market does the opposite of what you expected, and your stop loss is triggered.

This common scenario, which we have all unfortunately experienced, raises the question: What separates these “almost” trades from the truly higher-probability setups? 

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The State of Alignment

A high-probability setup isn’t necessarily a single signal or chart pattern. It is the coming together of several factors in a way that can potentially increase the likelihood of a successful trade. 

When combined, six interconnected layers can come together to form the full “anatomy” of a higher-probability trading setup:

• Context
• Structure
• Confluence
• Timing
• Management 
• Psychology

When more of these factors are in place, the greater the (potential) probability your trade will behave as expected.

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Market Context 

When we explore market context, we are looking at the underlying background conditions that may help some trading ideas thrive, and contribute to others failing.

Regime Awareness

Every trading strategy you choose to create has a natural set of market circumstances that could be an optimum trading environment for that particular trading approach.

For example:

• Trending regimes may favour momentum or breakout setups.
• Ranging regimes may suit mean-reversion or bounce systems.
• High-volatility regimes create opportunity but demand wider stops and quicker management.

Investing time considering the underlying market regime may help avoid the temptation to force a trending system into a sideways market.

Simply looking at the slope of a 50-period moving average or the width of a Bollinger Band can suggest what type of market is currently in play. 

Sentiment Alignment

If risk sentiment shifts towards a specific (or a group) of related assets, the technical picture is more likely to change to match that. 

For example, if the USD index is broadly strengthening as an underlying move, then looking for long trades in EURUSD setups may end up fighting headwinds.

Setting yourself some simple rules can help, as trading against a potential tidal wave of opposite price change in a related asset is not usually a strong foundation on which to base a trading decision.

Key Reference Zones

Context also means the location of the current price relative to levels or previous landmarks.

Some examples include:

• Weekly highs/lows
• Prior session ranges, e.g. the Asian high and low as we move into the European session
• Major “round” psychological numbers (e.g., 1.10, 1000)
  
  

A long trading setup into these areas of market importance may result in an overhead resistance, or a short trade into a potential area of support may reduce the probability of a continuation of that price move before the trade even starts.

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Market Structure 

Structure is the visual rhythm of price that you may see on the chart. It involves the sequences of trader impulses and corrections that end up defining the overall direction and the likelihood of continuation:

• Uptrend: Higher highs (HH) and higher lows (HL)
• Downtrend: Lower highs (LH) and lower lows (LL)
• Transition: Break in structure often followed by a retest of previous levels.

A pullback in an uptrend followed by renewed buying pressure over a previous price swing high point may well constitute a higher-probability buy than a random candle pattern in the middle of nowhere.

Compression and Expansion

Markets move through cycles of energy build-up and release. It is a reflection of the repositioning of asset holdings, subtle institutional accumulation, or a response to new information, and may all result in different, albeit temporary, broad price scenarios.

• Compression: Evidenced by a tightening range, declining ATR, smaller candles, and so suggesting a period of indecision or exhaustion of a previous price move, 
• Expansion: Evidenced by a sudden breakout, larger candle bodies, and a volume spike, is suggestive of a move that is now underway.
  
  

A breakout that clears a liquidity zone often runs further, as ‘trapped’ traders may further fuel the move as they scramble to reposition.

A setup aligned with such liquidity flows may carry a higher probability than one trading directly into it.

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Confluence 

Confluence is the art of layering independent evidence to create a whole story. Think of it as a type of “market forensics” — each piece of confirmation evidence may offer a “better hand’ or further positive alignment for your idea.

There are three noteworthy types of confluence:

1. Technical Confluence – Multiple technical tools agree with your trading idea:

• Moving average alignment (e.g., 20 EMA above 50 EMA) for a long trade
• A Fibonacci retracement level is lining up with a previously identified support level.
• Momentum is increasing on indicators such as the MACD.

2. Multi-Timeframe Confluence – Where a lower timeframe setup is consistent with a higher timeframe trend. If you have alignment of breakout evidence across multiple timeframes, any move will often be strengthened by different traders trading on different timeframes, all jumping into new trades together.

3. Volume Confluence – Any directional move, if supported by increasing volume, suggests higher levels of market participation. Whereas falling volume may be indicative of a lesser market enthusiasm for a particular price move.

Confluence is not about clutter on your chart. Adding indicators, e.g., three oscillators showing the same thing, may make your chart look like a work of art, but it offers little to your trading decision-making and may dilute action clarity.

Think of it this way: Confluence comes from having different dimensions of evidence and seeing them align. Price, time, momentum, and participation (which is evidenced by volume) can all contribute.

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Timing & Execution 

An alignment in context and structure can still fail to produce a desired outcome if your timing is not as it should be. Execution is where higher probability traders may separate themselves from hopeful ones.

Entry Timing

• Confirmation: Wait for the candle to close beyond the structure or level. Avoid the temptation to try to jump in early on a premature breakout wick before the candle is mature.
• Retests: If the price has retested and respected a breakout level, it may filter out some false breaks that we will often see.
• Then act: Be patient for the setup to complete. Talking yourself out of a trade for the sake of just one more candle” confirmation may, over time, erode potential as you are repeatedly late into trades.

Session & Liquidity Windows

Markets breathe differently throughout the day as one session rolls into another. Each session's characteristics may suit different strategies. 

For example:

• London Open: Often has a volatility surge; Range breaks may work well.
• New York Overlap: Often, we will see some continuation or reversal of morning trends.
• Asian Session: A quieter session where mean-reversion or range trading approaches may do well

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Trade Management 

Managing the position well after entry can turn probability into realised profit, or if mismanaged, can result in losses compounding or giving back unrealised profit to the market. 

Pre-defined Invalidation

Asking yourself before entry: “What would the market have to do to prove me wrong?” could be an approach worth trying. 

This facilitates stops to be placed logically rather than emotionally. If a trade idea moves against your original thinking, based on a change to a state of unalignment, then considering exit would seem logical. 

Scaling & Partial Exits

High-probability trade entries will still benefit from dynamic exit approaches that may involve partial position closes and adaptive trailing of your initial stop.

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Trader Psychology 

One of the most important and overlooked components of a higher-probability setup is you.

It is you who makes the choices to adopt these practices, and you who must battle the common trading “demons” of fear, impatience, and distorted expectation.

Let's be real, higher-probability trades are less common than many may lead you to believe. 

Many traders destroy their potential to develop any trading edge by taking frequent low-probability setups out of a desire to be “in the market.” 

It can take strength to be inactive for periods of time and exercise that patience for every box to be ticked in your plan before acting.

Measure “You” performance

Each trade you take becomes data and can provide invaluable feedback. You can only make a judgment of a planned strategy if you have followed it to the letter. 

Discipline in execution can be your greatest ally or enemy in determining whether you ultimately achieve positive trading outcomes.

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Bringing It All Together – The Setup Blueprint

Final Thoughts

Higher-probability setups are not found but are constructed methodically. 

A trader who understands the “higher-probability anatomy” is less likely to chase trades or feel the need to always be in the market. They will see merit in ticking all the right boxes and then taking decisive action when it is time to do so. 

It is now up to you to review what you have in place now, identify gaps that may exist, and commit to taking action!