US Dollar Forecast: DXY Firms as CPI Miss Locks In Fed Cut, Outlook Remains Bullish

US Dollar Holds Steady After CPI Miss Cements October Fed Cut

The US dollar ended Friday slightly higher after softer-than-expected inflation data solidified expectations that the Federal Reserve will lower interest rates at its next meeting. The Consumer Price Index (CPI) rose 0.3% in September, below the 0.4% consensus estimate, while the annual rate came in at 3.0%, also under forecasts.

The US Dollar Index (DXY) finished at 98.938, up 0.02% on the day, reversing early-session losses of 0.2%. Traders responded to the inflation data with renewed conviction that the Fed will move ahead with a 25 basis point cut next week.

Technically, the index is in an uptrend. The trend indicator is the 50-day moving average at 98.114.

Core CPI Softens; Rate Cut Odds Surge

Core CPI, excluding food and energy, increased just 0.2% on the month and 3.0% year-on-year, missing the expected 0.3% and 3.1%, respectively. The data, released despite the ongoing federal government shutdown, reinforced bets on a dovish shift by the Federal Reserve.

Fed funds futures are now pricing in a near-100% chance of a rate cut at the October meeting, with expectations for a follow-up cut in December climbing to 98.5%. Treasury yields reacted mildly. The 10-year yield ended at 4.003%, while the 2-year held at 3.484%, reflecting a market already positioned for easing.

Yen Slides, Euro and Sterling Mixed

The Japanese yen weakened to a two-week low, last trading at 152.882 per dollar. The decline followed higher oil prices and rising expectations that incoming Japanese Prime Minister Sanae Takaichi will announce a sizable fiscal stimulus package to counter rising living costs.

The euro edged up 0.06% to $1.16009 after data showed stronger-than-expected business activity in the euro zone, led by the services sector. Sterling dipped 0.11% to $1.33108, pulling back despite a retail sales beat driven by increased online gold purchases.

Trade Tensions Return, but Market Focus Is on China Talks

US-Canada trade tensions flared after President Trump terminated discussions in response to a provincial ad in Ontario. However, market reaction was limited, with investor focus shifting to next week’s meeting between Trump and Chinese President Xi Jinping, raising hopes for a breakthrough on tariffs.

Market Forecast: Bullish USD into FOMC

Friday’s CPI miss supports a near-term rate cut, but dollar strength held as traders anticipate limited easing beyond December. External pressure from trade risks, oil-driven inflation concerns, and fiscal expansion abroad support a bullish USD outlook into next week’s FOMC decision.

More Information in our Economic Calendar.