US Dollar Forecast: DXY Edges Lower as PPI Data Sparks Fed Speculation

U.S. Dollar Index Edges Lower on Economic Data and ECB Rate Cuts

The U.S. Dollar Index (DXY) slipped on Thursday after the release of the Producer Price Index (PPI) report. Earlier gains stalled at the resistance levels of 101.917 and 102.040, preventing the index from advancing towards the 50-day moving average of 102.927. On the downside, immediate support lies at 101.225, with potential for a deeper decline to 100.583-100.534 if bearish momentum picks up.

Treasury Yields and Inflation Reports

U.S. Treasury yields showed slight gains as traders reacted to the latest inflation data. The 10-year Treasury yield ticked up to 3.659%, while the 2-year yield increased to 3.648%. The PPI rose by 0.2% in August, matching forecasts, while core inflation—excluding food and energy—came in at 0.3%, slightly above expectations. This follows Wednesday’s Consumer Price Index (CPI) report, which showed inflation rising by 0.2% in line with estimates, though core inflation slightly exceeded projections at 0.3%.

Initial jobless claims also rose to 230,000 for the week, higher than the 225,000 anticipated by analysts. This mixed data adds uncertainty to the Federal Reserve’s upcoming rate decision next week.

ECB Rate Cut and Euro Movement

The European Central Bank (ECB) cut interest rates by 25 basis points on Thursday, lowering the deposit rate to 3.75%. The euro remained near a four-week low, trading at $1.1018, as traders anticipate further rate cuts later this year. ECB policymakers have signaled additional rate cuts in October and December as inflation risks ease and economic growth slows. Markets currently price in 64 basis points of cuts by the ECB before the end of the year.

Fed Rate Cut Speculation and Broader Currency Moves

Traders are now split on the size of the anticipated Federal Reserve rate cut at next week’s meeting, with a 25-basis-point reduction widely expected. However, some still speculate about a larger 50-basis-point cut. The Fed is facing a challenging decision, as inflation data remains sticky despite the weakening labor market.

In currency markets, the dollar gained 0.16% against the yen to 142.56, recovering from losses earlier in the week after hawkish comments from the Bank of Japan. Sterling held steady at $1.3045, and the dollar rose 0.2% against the Swiss franc, reaching 0.8543, its highest level since August 21.

Gold Prices Rise on Fed Rate Cut Expectations

Gold prices climbed on Thursday, driven by expectations of an imminent Federal Reserve rate cut. The precious metal rose as investors positioned for looser monetary policy, which could weaken the dollar and lower bond yields. Gold’s recent gains reflect a broader market sentiment that a dovish shift by the Fed is on the horizon, potentially lifting safe-haven assets. The price of gold remains sensitive to interest rate moves, with any larger-than-expected rate cut likely to provide further support for the metal in the coming weeks.

Market Forecast

Looking ahead, the dollar faces near-term downside risks as traders await the Fed’s decision next week. Should the central bank opt for a more aggressive 50-basis-point cut, the DXY could fall below the 101.225 support level, with potential downside to 100.534.

Meanwhile, gold may continue to benefit from expectations of lower rates, with further gains likely if the Fed signals prolonged monetary easing. For now, the DXY is expected to remain range-bound, while gold may see bullish momentum as Fed policy becomes clearer.