US Dollar Index (DXY) News: Bearish Outlook as Fed Rate Cut Bets Weigh on Dollar

Dollar Slips as Traders Anticipate Aggressive Fed Rate Cuts

The US dollar weakened on Thursday, touching one-month lows against the yen and falling against other major currencies as traders adjusted their expectations for an aggressive rate cut from the Federal Reserve. Concerns over the U.S. economic outlook, fueled by softening labor market data, have increased bets that the Fed could implement a more substantial rate cut in its upcoming policy meeting.

At 14:07 GMT, the U.S. Dollar Index (DXY) is trading 101.274, up 0.005 or +0.00%. This is up from an intraday low of 100.964.

Technically, the main trend is down. It will change to up on a trade through 101.917. A trade through 100.534 will reaffirm the downtrend.

The index is currently straddling a pivot at 101.225, which could determine the direction of the market today. On the upside, resistance is a pivot at 102.040. On the downside, major support is 100.617 to 100.534.

Softer U.S. Data Fuels Recession Concerns

Weak economic data this week, particularly related to the labor market, have reinforced concerns about the U.S. growth outlook. Job openings fell to a 3.5-year low in July, and private sector hiring, as reported by ADP, grew by only 99,000 jobs in August—far below expectations. Sectors like professional and business services, manufacturing, and information services all recorded job losses. Layoffs also surged, with August seeing the highest number of job cuts in 15 years, especially in the technology sector.

With the labor market showing signs of slowing, traders are increasingly factoring in the likelihood that the Fed will shift to a more dovish stance. Speculation has intensified over a “jumbo” rate cut, potentially 50 basis points, at the September meeting.

Gold Prices Surge on Rate-Cut Expectations

Gold rose on Thursday, fueled by growing anticipation of a deeper U.S. Federal Reserve rate-cutting cycle, which is widely expected to begin this month. Spot gold climbed 0.9%, reaching $2,516.18 per ounce, just shy of its recent record high of $2,531.60 set on August 20. The metal has found support from global economic uncertainties, as concerns over a slowdown have increased the downside risk across growth-dependent commodities.

Ole Hansen, head of commodity strategy at Saxo Bank, noted that the global slowdown has “lifted the prospect for a more aggressive rate-cutting cycle,” which continues to bolster gold prices.

Yen Strengthens on Safe-Haven Demand

The yen hit a one-month high, supported by both safe-haven flows and expectations of potential rate hikes from the Bank of Japan (BoJ). Market participants believe that as other central banks, including the Federal Reserve, are poised to cut rates, the narrowing interest rate differential could lift the yen. Traders are betting on a more favorable environment for the Japanese currency, which has faced pressure throughout 2023 due to ultra-low BoJ rates.

Implied Volatility on the Rise

Currency markets are preparing for significant moves, particularly around Friday’s upcoming nonfarm payrolls report. The options market indicates elevated demand for protection against currency swings, with overnight implied volatility for the euro reaching its highest since the banking crisis in March 2023 and for the yen at a one-year high. Friday’s data is expected to further clarify the U.S. labor market situation, potentially exacerbating or tempering the current sentiment of economic slowdown.

Market Forecast: Bearish Outlook for the Dollar

Given the recent data, the outlook for the dollar remains bearish in the short term. Traders are pricing in more than 100 basis points of rate cuts by the end of the year, reflecting rising fears of a U.S. economic slowdown. If the nonfarm payrolls report confirms weakening labor conditions, the dollar could face further downside pressure, particularly against safe-haven currencies like the yen and the euro. Gold may continue to rise as traders seek shelter in safe-haven assets amidst growing recession concerns.