US Dollar Index (DXY) News: Diverging Fed and BoE Policies Pressure DXY, Boost Pound

U.S. Dollar Index Slips as Rate Cut Expectations Weigh

The U.S. dollar index (DXY) slipped on Tuesday, touching 100.88, near a one-year low, as expectations for imminent rate cuts by the Federal Reserve pressured the greenback. In contrast, the British pound surged to its strongest level against the dollar since March 2022, reflecting diverging monetary policies in the U.S. and U.K.

At 13:46 GMT, the U.S. Dollar Index (DXY) is trading 100.833, down 0.027 or -0.03%.

Rate Cut Speculation Dominates Market Sentiment

Market sentiment remains dominated by the prospect of U.S. interest rate cuts, with the Fed’s September meeting almost certain to deliver a reduction. Traders are pricing in a 71.5% chance of a 25-basis-point cut, with a 28.5% probability of a larger 50-basis-point cut, according to the CME Group’s FedWatch Tool. Federal Reserve Chair Jerome Powell’s recent comments have further fueled these expectations, as he hinted at policy adjustments but refrained from specifying the exact timing or magnitude.

San Francisco Fed President Mary Daly has supported the likelihood of a rate reduction in September. With U.S. 10-year Treasury yields rising, investors are closely watching upcoming economic data to gauge the Fed’s next moves.

Pound and Euro Strengthen Against Dollar

The British pound gained 0.25% to $1.32195, its highest level in over two years, benefitting from contrasting monetary stances between the Federal Reserve and the Bank of England. While Powell’s comments pointed to an aggressive U.S. easing cycle, Bank of England Governor Andrew Bailey’s more cautious outlook led traders to expect a slower rate cut path in the U.K.

The euro also edged up to $1.1166, just below Monday’s 13-month high. However, Chris Turner of ING noted that after a strong rally since early August, the euro/dollar pair might be due for consolidation, especially given the recent surge in oil prices driven by Middle East tensions and Libyan supply disruptions.

Gold Consolidates Amid Rate Cut Uncertainty

Gold prices stabilized near recent highs, consolidating around $2,500 per ounce as traders sought clarity on the size of the Fed’s anticipated rate cut. Ole Hansen of Saxo Bank noted that gold might struggle to reach new highs in the short term unless data supports a larger 50-basis-point cut. However, if the Fed delivers 100 basis points in cuts by year-end, gold could break past $2,700.

Market Forecast: Continued Dollar Weakness Expected

Given the likelihood of U.S. rate cuts and potential for divergence in U.S. and U.K. monetary policies, the U.S. dollar is expected to remain under pressure in the short term. The pound may continue its upward trend, while the euro could see consolidation. Gold remains poised for further gains, depending on the Fed’s actions.

Technical Analysis

The U.S. Dollar Index (DXY) is slightly lower on Tuesday, but continues to consolidate around the December 28 main bottom at 100.617. We could see a technical bounce from this level, but we don’t expect to see it change the trend.

On the downside, a sustained move under 100.617 will likely lead to a near-term test of the June 14, 2023 main bottom at 99.578.