US Dollar (DXY): Weaker as Falling Inflation Fuels Fed Rate Cut Speculation

Highlights

• U.S. Dollar down over 1% for the week
• Money markets predicting Fed Rate cuts from July through end of year
• Euro and Pound rise as dollar weakens on interest rate cut expectations

Overview

The U.S. Dollar is hovering just above a one-year low against a group of currencies on Friday as traders increased expectations of the U.S. Federal Reserve ending its rate-hike cycle soon, following reports of reduced inflation.

At 07:00 GMT, June US Dollar Index futures are trading 100.535, down 0.165 or -0.16%. On Thursday, the Invesco DB US Dollar Index Bullish Fund ETF (UUP) settled at $27.51, down $0.14 or -0.51%. The current price has the index in a position to post a more than 1% decline for the week, and its steepest drop since January.

Biggest Drop in U.S. Producer Price Index Raises Interest Rate Hike Concerns

According to the U.S. Labor Department’s data released on Thursday, the producer price index (PPI) experienced its biggest drop in almost three years last month. This followed inflation data the day before, which suggested a moderation in consumer prices.

As a result of these developments, money markets are currently indicating a 69% probability of the Federal Reserve raising interest rates by 25 basis points in the upcoming month. However, markets are also pricing in a sequence of cuts from July through the end of the year, with rates predicted to be slightly above 4.3% in December.

Euro and Pound Rise, Dollar Falls on Interest Rate Cut Expectations

The euro reached a new one-year high of $1.1075, surpassing its previous high from Thursday, while the common currency was 0.2% higher at $1.1070, and on track to achieve a weekly gain of over 1.5%. The euro has been the most straightforward way to express a negative view of the dollar. The unexpected decline in the U.S. PPI has strengthened the conviction that the Fed will end its rate-hike cycle soon and possibly cut rates before the year’s end due to inflation concerns.

In addition, the British Pound climbed to a 10-month high of $1.2545 and remained 0.14% higher at $1.25405. In Asia, the Japanese Yen marginally increased to 132.47 per dollar, while the offshore yuan rose by more than 0.5% to 6.8327 per dollar.

June U.S. Dollar Index Technical Analysis

Currently, the main trend is down on increasing downside momentum. If the market trades through the main bottom from February 2 at 100.345, this would confirm the existing downtrend and potentially trigger an even steeper decline. According to the daily chart, there is significant room for further decline, with a major target being the April 21, 2022 main bottom at 98.630.