US Dollar Forecast: CPI Data Could Drive DXY Higher as Inflation Concerns Loom

Dollar Steady as Traders Await Key Fed Data

The U.S. dollar held steady to better, near seven-week highs on Tuesday, bolstered by expectations around the Federal Reserve’s rate path and ongoing geopolitical risks. Traders focused on Wednesday’s release of the September Federal Reserve meeting minutes and Thursday’s Consumer Price Index (CPI) data for clues on potential shifts in U.S. monetary policy.

At 16:12 GMT, the U.S. Dollar Index (DXY) is trading 102.532, up 0.048 or +0.05%.

Dollar Benefits from Fed Rate Uncertainty

After a stronger-than-expected U.S. jobs report last week, market sentiment has shifted towards more conservative rate cuts from the Federal Reserve. There is now a 90% chance of a 25-basis-point rate reduction in November, according to the CME FedWatch tool, with fewer traders betting on a larger cut by year-end. This dovish stance has helped the dollar gain strength across major currencies, reaching multi-week highs against the euro, pound, and yen.

The dollar index (DXY), a key measure of the greenback against a basket of major currencies, remains elevated amid lingering uncertainties in the Middle East and China’s economic struggles.

Euro, Pound, and Yen Trade Mixed Against Dollar

The euro edged 0.02% lower, staying close to the seven-week low of $1.0951 hit last week, as traders awaited clearer guidance from the Fed. Similarly, the pound inched up 0.17% to $1.3104, recovering from a three-week low. Meanwhile, the Japanese yen gained some ground as risk-averse investors flocked to safe-haven assets amid geopolitical concerns, with the dollar slipping 0.07% to 148.07 yen after recent highs.

Gold prices dropped for a fifth session as diminished Fed rate cut expectations and rising U.S. Treasury yields weighed on demand. Recent strong jobs data reduced the chances of a larger rate cut in November. However, geopolitical risks could support gold prices as a safe-haven asset in the near future.

U.S. Treasury Yields Remain Elevated

Treasury yields also held firm, reflecting investor caution. The 10-year U.S. Treasury yield hovered around 4.03%, its highest in over two months, as traders tempered their bets on large-scale rate cuts. Yields remain sensitive to upcoming inflation data, with traders awaiting clarity from the Federal Reserve’s minutes and the CPI report.

The 2-year Treasury yield slipped by 4 basis points to 3.967%, yet still reflects market caution regarding the Fed’s longer-term stance on rate easing.

Market Forecast: Dollar Strength Likely to Persist

Looking ahead, the dollar is expected to remain strong, driven by a combination of geopolitical concerns and moderate U.S. inflation expectations. If Thursday’s CPI data comes in softer than anticipated, it could reinforce the Fed’s cautious approach to rate cuts, potentially calming market expectations of aggressive easing. However, should inflation pressures remain sticky, the likelihood of no November rate cut may increase, leading to higher yields and a stronger U.S. dollar.

In the near term, the dollar’s bullish momentum is likely to continue, supported by safe-haven demand and a hawkish tilt from the Fed. Traders should closely monitor inflation data and Fed commentary for additional guidance on the dollar’s next moves.