US Dollar (DXY) Index News: September Fed Rate Cut Likely as Manufacturing Slows

U.S. Dollar Drops on Weak Manufacturing Data

The U.S. Dollar is trading lower against a basket of major currencies following a disappointing manufacturing report, increasing the likelihood of a Federal Reserve rate cut in September.

At 14:30 GMT, the U.S. Dollar Index is trading 104.271, down 0.354 or -0.34%.

Manufacturing Slowdown

U.S. manufacturing activity slowed for the second consecutive month in May. The Institute for Supply Management’s (ISM) manufacturing purchasing managers index (PMI) dropped to 48.7 from 49.2 in April, indicating contraction. This was below economists’ median estimate of 49.6 and marked the second month below the 50 level, separating growth from contraction. New goods orders fell by the most in nearly two years, reflecting ongoing pressure on the factory sector.

High Borrowing Costs

The factory sector has struggled for over a year, with ISM’s measure of output in contraction for 18 of the past 19 months. High interest rates from the Federal Reserve’s monetary policy tightening have curbed demand for goods. While there were hopes for a mid-year rate cut, persistent inflation in the first quarter led to delays, with September now seen as the earliest possible time for rate reductions.

Decline in New Orders

Borrowing costs at their highest in two decades have led to a significant drop in new orders for manufacturers, with ISM’s new orders index falling to 45.4, a one-year low. Consumer spending on goods also declined in April, indicating a broader softening of expenditure as household savings dwindle and reliance on credit cards grows.

Input Costs and Employment

There was some relief in factory input costs, which had been rising earlier this year. ISM’s prices paid index fell to 57 from 60.9, offering a potential positive signal for a rate cut. Economists had predicted a drop to 58.5. Factory employment saw growth for the first time since last September, despite the overall downturn.

Is This Enough for a September Rate Cut?

The key question is whether the decline in input costs is enough for the Fed to cut rates or if they will wait until the Consumer Price Index (CPI) reaches the 2% target. This uncertainty has prevented a significant drop in the U.S. Dollar following the PMI news. Many traders are cautious ahead of Friday’s Non-Farm Payrolls report, which could provide further market direction.

Market Forecast: Bearish

Based on the current data, the outlook for the U.S. Dollar remains bearish. Weak manufacturing activity and declining new orders, coupled with high borrowing costs, suggest continued downward pressure on the currency. The potential for a rate cut in September adds to this bearish sentiment.

Technical Analysis

The U.S. Dollar Index is trading on the weakside of the 200-day moving average at 104.429 on Monday. This makes it vulnerable to a steep near-term correction into at least 103.572.

Regaining the long-term trend indicator could be a sign that the bulls have returned, but don’t expect a major rally to develop unless the buying is strong enough to overcome the 50-day moving average at 105.089. This intermediate trend indicator stopped the rally last week.