US Dollar Index (DXY) News: Dollar Climbs Ahead of Key Economic Data and Fed Signals

Dollar Edges Higher as Traders Await Fed’s September Decision

The U.S. dollar is climbing on Wednesday after recent declines that pushed it to its weakest level in over a year. Traders are now focused on upcoming economic data that could influence the Federal Reserve’s policy decision in September.

At 12:25 GMT, the U.S. Dollar Index is trading 101.098, up 0.547 or +0.54%.

Dollar Index Sees Modest Recovery

The U.S. Dollar Index (DXY), which tracks the dollar against a basket of six major currencies, rose over 0.50% to 101.14, recovering slightly after hitting a 13-month low of 100.51 the previous session. Despite this improvement, the index is still on track for its largest monthly drop since November 2022. Earlier in August, concerns about a potential U.S. recession and hawkish signals from the Bank of Japan weakened the dollar, leading to gains in other major currencies.

Market expectations have shifted significantly, with traders now anticipating substantial Fed rate cuts by the end of the year. Ed Hutchings, head of rates at Aviva Investors, noted, “The market has priced in close to a 3% terminal rate, down from over 5% currently. However, given the rapid adjustment, there may be potential for yields to rise and for the dollar’s decline to pause.”

Fed’s Next Steps Under Close Watch

Investors are closely monitoring the upcoming U.S. economic data, particularly the second-quarter GDP estimate and the core Personal Consumption Expenditures (PCE) index, which is the Fed’s preferred measure of inflation. These figures will play a critical role in shaping expectations for the Fed’s September meeting, where a rate cut is widely anticipated.

The CME Group’s FedWatch Tool shows a 37% probability of a 50-basis-point rate cut next month, up from 29% a week ago. Overall, traders expect over 100 basis points of easing by the end of the year.

Global Currency Reactions

The dollar’s stabilization had mixed effects on other major currencies. The British pound dipped 0.2% to $1.3230, pulling back from a high of $1.3269, as traders speculate that the Bank of England may ease monetary policy more gradually than the Fed. The euro also fell 0.4% to $1.1141, though it remains close to the 13-month peak it reached earlier this week.

In Japan, the yen slipped to 144.31 per dollar, moving away from a recent three-week high. Meanwhile, the U.S. 10-year Treasury yield dipped as markets awaited further clarity from the upcoming U.S. inflation data.

Gold Prices Decline with Dollar Strength

Gold prices fell on Wednesday, with spot gold dropping below the $2,500 mark as the dollar gained strength. Despite recent gains that took gold to a record high of $2,531.77, uncertainty surrounding the Fed’s September meeting has cooled investor enthusiasm.

Physically backed gold ETFs have seen inflows for four consecutive months, reflecting continued interest in the precious metal. The World Gold Council reported net inflows of 8 metric tons ($403 million) last week, signaling ongoing demand as investors brace for potential Fed rate cuts.

Market Forecast: Bearish Sentiment Prevails

Looking ahead, the dollar is likely to remain under pressure, with its direction largely dependent on upcoming U.S. economic data and the Fed’s response. While short-term recoveries are possible, the broader outlook for the dollar remains bearish, especially if the Fed confirms aggressive rate cuts in September. Traders should be prepared for continued market activity as the Fed’s next move becomes clearer.

Technical Analysis

The U.S. Dollar Index (DXY) is rebounding on Wednesday after selling pressure dried up, following a test of its lowest level since December 2023. Although we’ll concede there may be some speculative buyers present, we believe the move is being primarily driven by profit-taking and short-covering. Perhaps even some end of the month position-squaring.