US Dollar Forecast: DXY Pressured as Yields Fall, Euro Gains Despite Hot PPI

Dollar Struggles to Rally Despite Hot PPI as Yields Ease and Euro Gains

The U.S. dollar failed to gain traction on Thursday despite another inflation report showing stronger-than-expected producer prices. A decline in Treasury yields and a strengthening euro kept dollar bulls in check, as traders assessed the Federal Reserve’s next move and awaited the preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.

PPI Rises, but Bond Market Reaction Is Muted

The latest Producer Price Index (PPI) report showed a 0.4% monthly increase in January, exceeding the expected 0.3% rise. Core PPI, which excludes food and energy, increased by 0.3%, aligning with forecasts. However, some traders viewed the details as less concerning, particularly the personal consumption component, which rose only 0.3%, significantly lower than December’s 0.7% increase.

Treasury yields, which surged after the hot Consumer Price Index (CPI) data on Wednesday, pulled back despite the PPI surprise. The 10-year Treasury yield fell 7 basis points to 4.559%, while the 2-year yield dipped 4 basis points to 4.318%. The bond market’s response suggests traders are looking ahead to softer PCE data, which could support the Fed’s eventual case for rate cuts.

Euro Strength Pressures the Dollar

The euro gained against the dollar, touching a one-week high of 1.0440 before retracing slightly. Optimism over a potential peace agreement in Ukraine provided a lift to the single currency. However, concerns remain about the broader geopolitical landscape, particularly the absence of European leaders in ongoing discussions.

Adding to the dollar’s challenges, former U.S. President Donald Trump’s comments about upcoming reciprocal tariffs sparked uncertainty. While trade tensions historically support the dollar as a safe haven, traders remain cautious about the potential inflationary effects of new tariffs.

Fed Rate Cut Expectations Remain a Key Factor

Despite inflation data running hotter than expected, markets still anticipate rate cuts later this year. Fed Chair Jerome Powell reiterated that while inflation is not yet at the Fed’s 2% target, the central bank is in no rush to adjust policy. Futures markets currently price in around 29 basis points of rate cuts by year-end, down from 37 basis points before the CPI release.

Additionally, Citi analysts expect the core PCE index to rise just 0.22% in January, down from 0.45% in December. If confirmed, this would bring the annual inflation rate down to 2.5%, reinforcing expectations that inflation pressures are cooling, albeit gradually.

Technical Outlook: Key Levels to Watch

The U.S. Dollar Index (DXY) remains under pressure, trading below its 50-day moving average at 107.984 and a key pivot level at 108.068. Sellers remain in control unless the index can reclaim these levels.

A sustained move above 108.523 could shift momentum in favor of the bulls, while a break below 107.296 would likely signal further downside. Traders will be closely watching upcoming economic data, particularly the PCE report, for confirmation of the Fed’s inflation outlook.

More Information in our Economic Calendar.