US Dollar Outlook: Bearish Outlook as Inflation Uncertainty and Tariff Risks Pressure DXY

US Dollar Index Faces Pressure as Tariff Uncertainty and Fed Policy Weigh on Markets

The US Dollar Index (DXY) is on track for a weekly loss as shifting Federal Reserve expectations, weaker retail sales data, and tariff uncertainty drive market sentiment. After initially strengthening on hotter-than-expected inflation data, the dollar retreated amid softer economic indicators and a more dovish shift in rate cut expectations.

Tariff Concerns Initially Boost Dollar Before Market Reassessment

President Donald Trump’s announcement of reciprocal tariffs on countries taxing US imports initially led to concerns of inflationary pressures, supporting the dollar. However, a White House clarification that tariff implementation would be delayed until after April 1 triggered a reassessment. Markets perceived this as a repeat of prior tariff threats that ultimately resulted in limited action, leading to dollar weakness.

Inflation Data Creates Policy Uncertainty

The week began with a stronger-than-expected Consumer Price Index (CPI) report, which showed a 0.5% monthly rise, exceeding the 0.3% forecast. This pushed traders to scale back expectations for aggressive Federal Reserve rate cuts, strengthening the dollar. However, later in the week, the Producer Price Index Consumer Price Index (CPI) report pointed to lower-than-expected core inflation, causing a reversal in sentiment.

As a result, traders adjusted their expectations, now pricing in 33 basis points of rate cuts by December, up from 27 basis points earlier in the week. This policy uncertainty, combined with Powell’s “wait and see” stance, left the dollar in a volatile position.

Weak Retail Sales and Global Factors Add Pressure

US retail sales data showed a 0.9% decline in January, the largest drop in nearly two years. The weakness in consumer spending raised concerns about economic momentum and reinforced the idea that the Fed may need to ease policy later this year.

Meanwhile, optimism over a potential Russia-Ukraine peace deal supported the euro, which rose to $1.0508, marking a weekly gain of 1.7%. The Japanese yen also strengthened against the dollar, reaching 152.24 per dollar, further pressuring DXY.

Market Outlook: Key Levels and Risks Ahead

The US Dollar Index fell to 106.69 and is on track for a 1.3% weekly decline. Immediate support is seen near 106.50, with stronger technical levels around 105.20 and 103.98 if selling pressure continues. Resistance stands near 108.50, followed by the recent peak of 110.17.

Looking ahead, traders will focus on the upcoming Personal Consumption Expenditures (PCE) report, the Fed’s preferred inflation measure. Any upside surprises in PCE could reinforce rate-hike expectations and provide support for the dollar. However, continued tariff uncertainty and geopolitical developments will keep volatility elevated in the near term.

More Information in our Economic Calendar.