The dollar is Awaiting the Federal Reserve's Verdict Before Embarking on Further Rally

The US Dollar is undergoing a phase of consolidation on Friday, characterized by lower highs and higher lows, following a surge in volatility earlier this week. Traders find themselves in a state of uncertainty as they approach the impending first US Federal Reserve meeting scheduled for the end of January. While it has become evident that there won't be a rate cut at this meeting, traders have merely postponed their rate-cut expectations to May (from March). This delay improves chances of the greenback to extend its rally if data continues to surprise on the upside.On the economic front, the trajectory of the US Dollar hinges on a singular factor: the University of Michigan Consumer Sentiment Index for January, coupled with inflation expectations. Considering the recent soft indicators such as the NY Empire Manufacturing Index and the Philadelphia Manufacturing number, both displaying considerable weakness, a contraction in the Michigan Sentiment number might prompt traders to push back expectations for an initial rate cut from the Fed to March once again.The US Dollar Index (DXY) finds itself in a precarious position on the charts, caught between conflicting forces. Despite seemingly bullish moves earlier in the week, the US Dollar's inability to initiate a significant rally on the DXY chart is rationalized by traders merely readjusting their bets for an initial rate cut by the Fed, shifting it from March to June. While this calls for a higher valuation of the US Dollar, it may not be sufficient to move away from the 55-day and the 200-day Simple Moving Averages (SMA) near 103.30 and 103.50, respectively.Equity markets have demonstrated resilience, experiencing a notable rebound. European equities are on the verge of erasing all losses incurred earlier in the week, potentially closing the week on a flat note if current gains persist into the European close on Friday. In the US, the Dow Jones is nearing a recovery of losses from earlier in the week, while the Nasdaq has already secured a solid position in the green for the week's close.The benchmark 10-year US Treasury Note remains stable at 4.13%, maintaining a five-day winning streak.Major Upcoming Economic News and Reports:The Senate's stopgap funding bill has garnered enough votes to pass and is now progressing to the House.Around 15:00 GMT, the University of Michigan is set to release its figures:The Consumer Sentiment Index for January is expected to rise from 69.7 to 70, with analysts estimating a low of 66 and a high of 72.5. Any figure above 72.5 will likely trigger significant strength in the US Dollar, while a print below 66 could result in substantial weakness.Inflation expectations are projected to increase from 2.9% to 3.0%.