US Dollar Index (DXY) News: Fed Rate Cut Bets Shrink as Dollar Eyes Best Week Since April

Dollar Holds Steady as Traders Scale Back on Fed Rate Cut Bets

The U.S. dollar maintained its position near a one-week high on Friday, poised to break a five-week losing streak. This follows robust economic data that has led traders to reconsider the likelihood of aggressive interest rate cuts by the Federal Reserve.

Inflation Data in Focus

July’s inflation data, a key metric watched by the Federal Reserve, showed slight increases, reinforcing expectations that the Fed may take a more measured approach to rate cuts. The Commerce Department reported that the personal consumption expenditures (PCE) price index rose 0.2% month-on-month, aligning with market expectations. Year-over-year, the index increased by 2.5%, while the core PCE, which excludes food and energy prices, rose 2.6%—just below the anticipated 2.7%.

The Federal Reserve, which closely monitors the core PCE as an indicator of long-term inflation trends, is likely to find some relief in these figures as they show inflation holding steady. However, shelter costs continue to climb, increasing by 0.4% in July, which could complicate the Fed’s policy decisions moving forward.

Economic Growth and Market Reactions

In addition to the inflation data, the U.S. economy’s strength was highlighted by an upward revision in Q2 GDP growth. The economy expanded at an annualized rate of 3.0%, up from the previously reported 2.8%. This stronger-than-expected growth suggests that consumer spending remains robust, a key driver of economic activity.

Markets reacted cautiously to the economic data, with U.S. equity futures indicating a slightly higher opening and Treasury yields rising. Gold was muted as it hovered just under its record high. The U.S. dollar index (DXY), which tracks the greenback against a basket of six major currencies, climbed to 101.596, its highest level since August 20, as traders adjusted their expectations for Fed policy.

Forex Market Movements

The euro remained flat at $1.1075 after data confirmed that inflation in the eurozone slowed to 2.2% year-on-year in August, down from 2.6% in July. This reinforces the European Central Bank’s path toward further rate cuts next month. The euro had weakened to a one-week low on Thursday following softer-than-expected German inflation data.

Sterling edged up 0.1% to $1.318, recovering slightly from a one-week low, while the Japanese yen held steady near 145 per dollar, despite domestic data showing faster-than-expected inflation in Tokyo.

Market Forecast

Looking ahead, the U.S. dollar is on track for a 0.9% gain this week, marking its best performance since April. However, the broader outlook for the dollar remains mixed. With the Fed’s September rate cut seen as a certainty, the extent of the cut remains uncertain. Market sentiment currently suggests a 66% probability of a 25-basis-point cut, with diminishing expectations for a more aggressive 50-basis-point reduction.

In the near term, the dollar may continue to benefit from strong economic data, but its performance will likely hinge on further signals from the Fed regarding its rate-cutting plans. As inflation shows signs of stabilizing and economic growth remains resilient, the greenback could see continued support, particularly if the Fed opts for a more conservative approach to monetary easing.

Technical Analysis

The main trend is down, but the U.S. Dollar Index (DXY) seems to have enough upside momentum to challenge the 50% level at 102.030 over the near-term. Look for sellers to return on the first test of this level.