US Dollar Index Dips Near 98.00 Amid Dovish Fed Expectations, CPI Data in Focus

US Dollar Index Struggles Near 98.00 as Traders Price in Fed Rate Cuts

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against a basket of six major currencies, has been on the back foot in recent trading sessions, dropping to around 98.00 during Monday's Asian session. The Greenback is facing significant pressure following signs of softness in US economic data, which has led traders to increase their expectations of further interest rate cuts by the Federal Reserve (Fed) this year.

Weak US Economic Data Fuels Rate Cut Expectations

Recent reports showing higher Initial Jobless Claims and a weaker-than-expected July Nonfarm Payrolls have reignited concerns about the health of the US economy. These developments have led markets to adjust their outlook for the Federal Reserve’s monetary policy. According to the CME FedWatch Tool, there is now an 89% probability of a rate cut at the Fed’s September meeting, a significant increase from 80% just a week ago.

The probability of further rate cuts this year has grown as a result, with markets also pricing in potential action in December. The soft economic data has raised doubts about the sustainability of economic growth in the US, prompting traders to expect the central bank to act by lowering interest rates to support the economy.

Fed Governor Michelle Bowman Weighs In: Three Rate Cuts Likely This Year

Adding fuel to these expectations, Fed Governor Michelle Bowman commented on Saturday that three rate cuts are likely to be necessary this year. Bowman highlighted that the softening in the jobs market outweighs the risks posed by higher inflation in the future, further suggesting that the central bank might prioritize economic growth over inflation control in the short term.

Her remarks have reinforced the market’s dovish outlook on US monetary policy, contributing to a weaker US Dollar. The idea that the Fed may continue to ease policy throughout the year has pressured the USD against its major counterparts, driving the DXY lower.

Focus Shifts to Upcoming US Inflation Data

With the US Dollar under pressure, traders are now focused on upcoming economic data, particularly the release of the US Consumer Price Index (CPI) data on Tuesday. This report will be crucial in determining the trajectory of inflation in the US and could influence the Fed’s decision-making process regarding future rate cuts. A higher-than-expected CPI print could cause market participants to reconsider the outlook for rate cuts, potentially providing support for the USD. On the other hand, a weaker CPI print could strengthen the case for further dovish action from the Fed.

Beyond the CPI release, traders will also be monitoring Thursday's preliminary UK Q2 GDP figures and the US Producer Price Index (PPI) for additional economic insights. The combination of these reports could give traders more clarity on the global economic outlook and further shape expectations for central bank actions.

Outlook for the US Dollar Index

The DXY is likely to remain volatile in the coming days as traders digest the latest economic data and assess the likelihood of further rate cuts by the Fed. If the US inflation data supports the case for additional dovish action, the US Dollar could face continued weakness, keeping the DXY near or below the 98.00 level. However, stronger-than-expected inflation figures could prompt a shift in market expectations, leading to a potential rebound in the US Dollar.