US Dollar Forecast: DXY Breaks 101.225, Eyes CPI Report for Further Direction

U.S. Dollar Index (DXY) Pushes Higher, Fed Cut Bets in Focus

The U.S. Dollar Index (DXY) traded higher on Monday, breaking above the minor pivot at 101.225, which now acts as near-term support. With upside momentum building, the next target for traders is the 101.917 resistance level.

A breakout above this key resistance would shift the main trend to bullish, setting the stage for a move toward the 102.040 level. This zone is a critical area for traders, as clearing it could trigger further buying and accelerate the dollar’s upward move. All eyes are now on this breakout scenario.

At 14:24 GMT, the U.S. Dollar Index is trading 101.533, up 0.345 or +0.34%.

Currencies

The dollar’s strength comes as traders reduce expectations for a larger Federal Reserve rate cut. Following Friday’s mixed U.S. jobs report, speculation about the extent of the Fed’s policy easing has shifted. While employment growth in August underperformed expectations, wage growth remained robust, and the unemployment rate ticked lower. This fueled doubts over whether the Fed will cut by 50 basis points (bps) or settle for a smaller 25 bps reduction at its September meeting.

The yen, after four days of gains, weakened 0.7% to 143.35 per dollar, while the euro fell 0.3% to $1.1048. The British pound also softened, dipping to $1.3083, a two-week low. Meanwhile, the DXY index rose, indicating broader dollar strength against a basket of major currencies. Traders now await Wednesday’s U.S. inflation data, which could further influence Fed expectations.

Gold and Metals

Gold prices saw modest gains on Monday despite the rising dollar, buoyed by anticipation of Fed rate cuts. While the Fed is widely expected to lower rates, the size of the cut remains in question, leading to market volatility. Gold reached $2,531.60 on August 20, and analysts believe that if inflation data this week falls below expectations, hopes for a more aggressive 50 bps rate cut could propel gold to new all-time highs.

The upcoming U.S. inflation report and producer price index data will be crucial in determining the Fed’s next move, with consensus leaning towards a 25 bps cut. Even in this scenario, gold is unlikely to face substantial price declines due to the Fed’s clear path towards easing.

Market Forecast

The DXY’s recent break above 101.225 indicates short-term strength, with traders eyeing 101.917 as the next resistance. If the U.S. inflation report surprises to the downside, further dollar strength could emerge as the likelihood of a more aggressive rate cut diminishes.

Conversely, a lower-than-expected inflation reading could trigger renewed pressure on the dollar, benefiting gold. In the near term, traders should prepare for potential volatility driven by both the Fed decision and U.S. inflation data, with the dollar likely to remain supported until further clarity emerges.