US Dollar Forecast: DXY Gains as Gold Retreats After Hot U.S. Inflation Data

U.S. Dollar Index Climbs on Inflation Data, Eyes Fed Rate Cut Next Week

The U.S. Dollar Index (DXY) extended its rally on Thursday, marking a fifth consecutive session of gains. Although it touched an intraday high of 106.962, profit-taking at the 50% retracement level of 106.843 tempered its momentum. This level appears to serve as a short-term pivot, with sustained movement above it potentially targeting 107.993 to 108.071. Conversely, renewed selling could push the index toward support at 105.887 or lower to 105.420.

Inflation Fuels Dollar Strength

The dollar’s upward momentum was fueled by stronger-than-expected U.S. inflation data. The Labor Department reported a 0.4% monthly increase in producer prices for November, doubling market expectations of 0.2%. This data bolstered sentiment for the Federal Reserve to cut rates during its Dec. 17-18 meeting, with CME FedWatch now assigning a 98.4% probability of a 25-basis-point reduction.

Adding to the dollar’s allure, global central banks’ recent rate decisions maintained the greenback’s yield advantage. While the Fed is poised for easing, other central banks have made more aggressive rate cuts, including the European Central Bank’s (ECB) fourth cut of the year, which kept the euro subdued.

Euro and Yen Under Pressure

The euro fell 0.23% against the dollar, trading at $1.0472, as the ECB signaled further policy easing ahead. In contrast, the Swiss franc strengthened following a surprise 50-basis-point cut by the Swiss National Bank, lifting USD/CHF by 0.61% to 0.8898 francs.

The Japanese yen remained weak at 152.220 per dollar, despite retreating from a two-week high. Market participants have tempered expectations for a Bank of Japan rate hike in December, instead projecting a potential move in January.

Gold Retreats on Profit-Taking

Gold prices slipped from a one-month high on Thursday as traders locked in profits ahead of the Federal Reserve’s decision. Nonetheless, the overall environment, marked by geopolitical uncertainty and a supportive rate outlook, underpins bullish sentiment for the metal in the medium term.

Market Outlook

The DXY’s near-term direction hinges on its ability to sustain movement above the key 106.843 level. A decisive break higher could pave the way for testing the 107.993 region. However, a pullback may find support around 105.887. With inflation data reinforcing expectations of a Fed rate cut, the dollar’s yield advantage relative to other major currencies is likely to persist, supporting its bullish trend.