The US dollar fell to a near two-week low following the release of inflation data on Tuesday (August 12). The data largely met market expectations, and the cost of tariffs remains quietly absorbed in corporate profit margins, rather than passed on to consumers. This provides the Federal Reserve with policy leeway to respond to the weak employment data, potentially leading to interest rate cuts starting in September. The market is currently betting on this expectation, with speculation mounting of two more rate cuts this year. Trump's continued attacks on Powell on social media have also negatively impacted the dollar, further exacerbating bearish expectations for the US dollar.

During the Asian session on Wednesday (August 13), the US dollar index fluctuated narrowly and is currently trading around 98.07.



Inflation remains mild

July's CPI data came in within expectations, with overall inflation edging up 0.2% month-over-month (2.7% year-over-year) and core inflation ticking up 0.3% month-over-month (3.1% year-over-year). Energy prices fell 1.1%, while food prices remained flat. Even sectors most impacted by tariffs saw only modest increases. Core goods prices, excluding automobiles, rose just 0.2%, indicating that businesses are still absorbing most of the additional costs from tariffs. However, the services sector showed some activity, with airfares surging 4% and medical costs climbing 0.7%. However, housing costs, which rose only 0.2% month-over-month, offset this increase, with declining house prices and cooling rents playing a key role.

The market is therefore betting that despite high tariffs, inflation is unlikely to accelerate sharply this fall, except for a brief spike. If the economy (especially the job market) cools further, CPI inflation could even fall below the 2% target next year.

How will the Fed respond?

Ahead of the Federal Reserve's next meeting, we will also see the release of a jobs report, inflation data, and several other macroeconomic indicators. However, given the weak non-farm payroll data and the significant downward revision to the prior reading, coupled with the newly released CPI figures that were largely in line with expectations, the likelihood of the Fed initiating a rate cut in September is increasing significantly, with further 25 basis point cuts possible in October and December. For the US dollar, this means its exchange rate is likely to remain weak until the end of the year unless other major central banks move to easing policies at a faster pace.

USD Outlook: US dollar index resumes its decline


(Daily chart of the US Dollar Index)

From a technical perspective, if the current bearish flag support trendline breaks, the US dollar index could test the July low near 96.37. This trendline currently lies between 97.98 and 98.09, a key technical range. If broken, the 97.00 level could become an interim target before testing new lows in 2025, with resistance at 98.95. Technically, the current bearish trend would only be confirmed to have ended if the US dollar index breaks through the key resistance range of 100.00-100.15.

At 10:24 Beijing time, the current US dollar index is 98.07.