US Dollar Forecast: Bearish Pressure Builds on DXY as Fed Cut Odds Hit 98% After Soft CPI

Dollar Index Slips as Fed Cut Bets Climb and Political Pressure Mounts

The U.S. Dollar Index (DXY) extended its slide for a second consecutive session on Wednesday, weighed by soft inflation data and growing expectations of a Federal Reserve rate cut next month. At 97.81, DXY marked its lowest close since July 28, following Tuesday’s 0.5% drop and another 0.2% decline Wednesday. The move reflects heightened bearish sentiment as traders price in aggressive policy easing.

Fed Cut Odds Spike Following CPI and Political Pressure

July’s CPI print showed only a marginal increase, in line with expectations. That result eased concerns that recent tariff hikes are fueling consumer price pressure. As a result, Fed funds futures now imply a 98% chance of a rate cut at the central bank’s next meeting, with markets even entertaining the possibility of a 50 basis point move, according to LSEG data.

The Fed is also under mounting political pressure. Treasury Secretary Scott Bessent publicly advocated for a “series of rate cuts,” while President Trump escalated criticism of Fed Chair Jerome Powell. The administration has even floated legal action over the Fed’s headquarters renovation. Such political interference risks undermining the central bank’s credibility and could further weigh on the dollar.

Global Currencies Gain as Dollar Momentum Fades

DXY’s weakness supported gains across major currencies. The euro rose 0.3% to $1.1705, its highest since July 28, while the pound advanced 0.5% to $1.3572. Even with weaker jobs data, sterling drew support from the Bank of England’s cautious stance.

Commodity currencies also caught a bid, with the Australian and New Zealand dollars climbing 0.3% and 0.5%, respectively. The Reserve Bank of Australia delivered a rate cut in line with expectations but kept the door open for further easing.

Treasury Yields Fall as Inflation Outlook Eases

Bond markets responded with broad-based yield declines. The 10-year Treasury yield slipped to 4.233%, while the 2-year dropped over 6 basis points to 3.681%. The inflation data, combined with growing expectations of rate relief, sent yields lower across the curve. Traders are now bracing for Thursday’s PPI report and Friday’s retail sales and sentiment data for further clues on the Fed’s next move.

DXY Technicals Show Breakdown Below Key Support

Technically, DXY has broken below its 50-day SMA (98.10) and now tests the recent support at 97.945. A sustained move lower opens downside risk toward 97.109 and the July low of 96.377. Resistance stands at 98.317 and 98.683, with stronger overhead supply around 99.177 and 99.838. Long-term momentum remains bearish below the 200-day SMA at 104.086.

Market Outlook: DXY Faces Further Downside Risk

With dovish Fed expectations firmly priced in and political noise intensifying, DXY remains under pressure. Unless Friday’s retail sales or sentiment data surprise to the upside, the path of least resistance remains lower. Technical breakdowns and yield curve compression further support a bearish near-term outlook for the dollar.

More Information in our Economic Calendar.