US Dollar (DXY) Index News: Low Volume Weakness Ahead of US Economic Reports

Retail Sales Rise Only 0.1% in May

U.S. retail sales recorded a meager 0.1% rise in May, falling short of the 0.2% forecasted by economists and reflecting a downward revision for April’s data, which now shows a 0.2% decline. This underperformance highlights persistent economic sluggishness in the second quarter, dampening the dollar’s strength against a basket of currencies. The euro, a major component of the dollar index, also struggled due to political instability in France and the broader Eurozone.

Treasury Yields Fall on Economic Concerns

In response to the weak retail sales report, U.S. Treasury yields declined, with the 10-year yield dropping over 6 basis points to 4.215% and the 2-year yield falling more than 5 basis points to 4.708%. These moves reflect growing investor concern about the robustness of the U.S. economy and increased speculation about potential Fed rate cuts.

Fed Expected to Cut Rates in December

Signs of a weakening consumer sector have intensified speculation that the Federal Reserve might implement rate cuts later this year. Minneapolis Fed President Neel Kashkari suggested that a rate cut in December is a “reasonable prediction,” contingent on more concrete evidence of inflation returning to the 2% target. The Fed’s decision last week to hold rates steady at 5.25% to 5.50% supports this cautious stance.

Market Prices in Rate Cuts by September

Market sentiment has shifted, with traders now pricing in a 67% probability that the Fed will begin easing rates by September, according to the CME FedWatch tool. Approximately 48 basis points of rate cuts are anticipated for the remainder of the year, underscoring the market’s expectations of monetary easing.

Sterling Drops Slightly Before UK Inflation Data

Sterling experienced a minor drop of 0.03% to $1.2705 ahead of UK inflation data, expected to influence the Bank of England’s policy decision on Thursday. While a significant reduction in headline inflation is anticipated due to base effects and falling energy prices, the focus remains on services inflation, closely linked to wage growth and a tight labor market.

Market Forecast: Bearish Outlook for the Dollar

Given the recent data and prevailing market sentiment, the outlook for the U.S. dollar appears bearish in the short term. Anticipated rate cuts and economic concerns are likely to exert further downward pressure on the dollar, while Treasury yields and consumer spending trends will be critical factors to monitor moving forward.

The U.S. Dollar Index (DXY) is testing a critical area on the daily chart that could determine whether is moves higher from here or sinks sharply lower.

The critical level is the 50-day moving average at 105.200. The market has tried to sustain a breakout above this level since last Friday but it looks like its failing to attract enough buyers to do this.

A failure to hold the 50-day MA will put the market in an extremely weak position. It could even trigger an acceleration to the downside with the 200-day moving average at 104.470 the next target.