US Dollar (DXY) Index News: Greenback Faces First Monthly Decline in 2024

Dollar Edges Down Ahead of Key Inflation Data

The U.S. dollar edged lower on Tuesday, trading within tight ranges against major currencies as markets awaited significant inflation data from key global economies. This data is expected to influence the international interest rate outlook, potentially impacting the dollar’s performance.

Dollar’s Monthly Decline and Rate Cut Speculation

The greenback is nearing its first monthly decline of 2024. Athanasios Vamvakidis, global head of forex strategy at Bank of America, noted that expectations of Federal Reserve rate cuts by year-end, possibly even in December, are contributing to the dollar’s weakness. Weaker U.S. economic data and robust economic indicators from the eurozone have further pressured the dollar. Additionally, the Federal Reserve’s stance against further rate hikes has curtailed the dollar’s appreciation.

Market Sentiment and Rate Cut Pricing

Currently, markets are heavily pricing in a U.S. rate cut in December, with an 80% chance of a cut in November and a 60% chance in September. The dollar index, which measures the dollar against a basket of currencies, fell 0.22% to 104.37, marking a 1.7% decline for the month. Meanwhile, the euro gained 0.21% to $1.0881, despite dovish signals from European Central Bank (ECB) officials and stagnant German business morale in May.

Eurozone and U.S. Inflation Data in Focus

ECB’s Francois Villeroy de Galhau confirmed expectations of a rate cut next week unless significant surprises occur. However, investors are tempering their expectations for future ECB cuts, forecasting fewer rate reductions through 2024 and early 2025. German inflation data, due Wednesday, and the broader eurozone inflation reading on Friday will provide further clues on the ECB’s policy direction. The primary market focus remains on the U.S. core personal consumption expenditures (PCE) price index report due Friday, the Federal Reserve’s preferred inflation measure.

Impact on Other Currencies

Rodrigo Catril, senior FX strategist at National Australia Bank, stated that a benign PCE figure is essential to sustain current Fed rate cut expectations. Any upside surprise could drive U.S. yields higher and strengthen the dollar. The yen hovered near 157 per dollar, with potential for strengthening if the Fed cuts rates in 2024. However, delaying rate cuts to 2025 could see the yen testing 160, prompting potential intervention from Japanese authorities.

Broader Market Movements

The Bank of Japan’s (BOJ) inflation data showed all three key measures below 2% for the first time since August 2022, casting doubt on the timing of its next rate hike. Sterling and the New Zealand dollar rose to over two-month highs, trading at $1.279 and $0.6164, respectively.

Market Forecast

In the short term, the dollar’s performance will hinge on upcoming inflation data and Fed rate expectations. A stable PCE reading could support a bearish outlook for the dollar, reinforcing market anticipation of rate cuts. Conversely, higher-than-expected inflation figures could prompt a bullish shift, driving the dollar higher against its peers. Traders should closely monitor these developments to adjust their positions accordingly.

Technical Analysis

The U.S. Dollar Index is currently testing the 200-day moving average at 104.403, which could significantly impact its long-term direction.

If the index falls below the 200-day moving average, it could quickly test the minor support level at 104.08, potentially triggering a steeper decline.

Maintaining above the 200-day moving average suggests buyers are defending against a sharp drop, but gains may be limited by the 50-day moving average at 105.023, likely keeping the market rangebound.