US Dollar Forecast: DXY Retreats from 50-Day SMA as Inflation Expectations Decline

Dollar Index Retreats from 50-Day Average as Fed Expectations Reprice

The U.S. Dollar Index (DXY) slipped to 98.22 on Friday, down 0.40% on the day, as the greenback pulled back from the key 50-day simple moving average (SMA) near 98.70. After a steady advance from July’s low at 96.377, the DXY stalled just under the 50-day line, failing to break through the recent swing high of 98.950. Traders now eye the 97.664 level—the 50% short-term retracement—as the next technical support.

Is the Fed Tightening Narrative Losing Steam?

Stronger-than-expected U.S. retail sales and a drop in jobless claims last week temporarily boosted the dollar, trimming market expectations for aggressive Federal Reserve easing. Traders now price in around 45 basis points of rate cuts for the remainder of 2025, down slightly from 50 bps earlier in the week. The repricing followed June inflation data that showed the sharpest monthly CPI increase in five months, supporting the case for the Fed to hold off on deeper cuts.

However, investor sentiment remains fragile. Trump’s newly passed tax-cut and spending package has fueled concerns over fiscal sustainability, while the President’s continued criticism of Fed Chair Jerome Powell for not delivering faster rate relief injects fresh political uncertainty into the outlook.

Euro and Sterling Gain but Still Face Weekly Losses

Despite Thursday’s dollar weakness, the euro and British pound were set for weekly losses. EUR/USD was last up 0.4% at $1.1643, while GBP/USD rose 0.26% to $1.3453. The broader dollar index, which tracks the greenback against six major currencies, remains up 0.5% this week and has climbed 1.4% over the last two weeks. Yet year-to-date, the index is still down 9.15% following a deep selloff in March and April triggered by policy unpredictability.

Consumer Sentiment Inches Higher, Inflation Expectations Drop

The University of Michigan’s preliminary July report showed consumer sentiment rose to 61.8, its highest in five months but still 6.9% lower year-on-year. While current conditions improved, inflation expectations declined sharply. One-year expectations fell from 5.0% to 4.4%, and long-run expectations dropped to 3.6%, the lowest since February. This easing in inflation fears may temper aggressive Fed cut bets but supports a broader stabilization theme.

Market Outlook: DXY Faces Resistance, Support Eyed at 97.66

Technically, the Dollar Index remains capped by the descending 50-day SMA, with multiple failed attempts to break above recent swing highs. Unless DXY closes decisively above 99.421—the late June swing top—upside momentum remains limited.

Short-term focus is now on whether support at 97.664 holds. A break below this level would likely expose the early July low at 96.377. With fundamental tailwinds softening and political risks mounting, dollar bulls face a narrowing window.

More Information in our Economic Calendar.