US Dollar Forecast: DXY Gains as 50 bps Rate Cut Expectations Fade After CPI

The U.S. Dollar strengthened on Wednesday as traders assessed the latest Consumer Price Index (CPI) report, aiming to gauge the broader economy’s health ahead of the Federal Reserve’s rate decision next week.

August CPI data showed a modest 0.2% increase, in line with expectations, while the annual inflation rate dropped to 2.5%, the lowest level since February 2021. This was slightly under the forecast of 2.6%. However, the core CPI, which excludes food and energy prices, rose 0.3%, surpassing expectations of 0.2%. This suggests that while inflation is cooling overall, underlying pressures persist.

At 14:16 GMT, the U.S. Dollar Index (DXY) is trading 101.669, up 0.10 or +0.01%.

Rate Cut Expectations Strengthen

Despite the mixed inflation data, markets are still pricing in a high probability of a Federal Reserve rate cut at the September 17-18 meeting. According to the CME Group’s FedWatch Tool, traders see an 85% chance of a 25-basis-point cut, with a smaller 17% chance of a more aggressive 50-basis-point reduction. Some economists argue the Fed may need to cut rates more sharply to offset previous over-tightening, while others caution that such a move could destabilize markets.

Treasury Yields and Investor Reactions

U.S. Treasury yields edged higher on Wednesday following the CPI report. The 10-year Treasury yield increased by 2 basis points to 3.667%, while the 2-year yield rose 4 basis points to 3.646%. Higher yields reflect a cautious market stance as investors anticipate the Fed’s decision.

Euro and Gold Under Pressure

The U.S. Dollar’s rise put pressure on the Euro, which fell to its lowest level since mid-August, trading at 1.1012. The currency is nearing its 50-day moving average of 1.0962, indicating potential for further declines if the Dollar remains strong.

Gold also slipped, dropping by $11.47, or 0.47%, as rising Treasury yields and a stronger Dollar reduced its appeal. Investors are favoring yield-bearing assets over gold in the current environment.

Market Forecast: Dollar Set to Stay Strong

Looking ahead, the U.S. Dollar is likely to maintain its strength, supported by expectations of a moderate rate cut from the Federal Reserve. A 25-basis-point cut appears most likely, which would sustain the Dollar’s bullish trend while providing the economy with some relief. However, if the Fed opts for a more substantial rate cut, increased volatility could follow, particularly in currency markets.

The DXY has been sitting in a range since September 3. The price action suggests investor indecision and impending volatility.

The key level to watch is the daily pivot at 101.225. This is controlling the near-term direction of the index.

A sustained move over 101.225 will indicate the presence of buyers. Taking out 101.917 will change the main trend to up. A trade through 101.917 will reaffirm the uptrend. This could spike prices higher with the objective the 50-day moving average at 102.997.

A sustained move under 101.225 will be a sign of weakness. This could spike prices lower into the support cluster at 100.534 to 100.583.