On Wednesday (September 10), the U.S. producer price index unexpectedly fell in August, making the market more confident that the Federal Reserve will cut interest rates at its upcoming meeting. As a result, the U.S. dollar exchange rate fell slightly.



The U.S. Labor Department reported a 0.1% month-over-month decline in the overall producer price index (PPI), significantly below the 0.3% increase economists had expected. July's PPI was revised downward to show a 0.7% increase (preliminary reading: 0.9%). Year-over-year, the PPI rose 2.6%, below the 3.3% increase analysts expected in a Reuters poll.

Carl Weinberg of High Frequency Economics noted that the report showed "less worrisome inflation along the production chain," with core commodity prices rising but less than expected. This data eased market concerns about inflation, but it did not signal an easing stimulus sufficiently unexpected to significantly alter the probability of a rate cut.

Fed's monitoring tool shows strong bias towards 25 basis point rate cut

Following the data release, the Chicago Mercantile Exchange (CME) FedWatch Tool indicated a 100% probability of the Fed cutting its benchmark interest rate by 25 basis points, confirming expectations of a rate cut that were already near certain before the Producer Price Index data was released. However, the probability of a more aggressive 50 basis point rate cut remained low, at just 10%.

Traders are now awaiting the Consumer Price Index report, which could provide a clearer signal about the Fed's longer-term policy stance. A weak CPI reading could reignite talk of a bigger rate cut, but Ian Lyngen of BMO warned that Wednesday's Producer Price Index alone "is not enough to start the conversation about a 50 basis point Fed rate cut."

Rate cut bets push U.S. Treasury yields slightly lower

U.S. Treasury yields reacted modestly: the 10-year yield fell 2.7 basis points to 4.047%, the 2-year yield fell 1.5 basis points to 3.527%, and the 30-year yield fell to 4.699%. The yield curve remained relatively stable, indicating that the bond market has largely aligned with the Federal Reserve's expected policy path.

Short-term interest rates also fell slightly: the yield on the 1-month Treasury bill was 4.141%, and the yield on the 3-month Treasury bill was 4.035%. This trend reflects both the market's firm expectation of interest rate cuts and limited inflationary pressure in the near term.

Market Outlook: Consumer Price Index becomes the key catalyst, while the US dollar index is stuck below the resistance level


(Source of US Dollar Index daily chart: Yihuitong)

The US Dollar Index is currently fluctuating below resistance at 97.859. Wednesday's rebound, triggered by Producer Price Index data, failed to break through the 50-day SMA at 98.100 and the horizontal resistance at 98.317. This range has repeatedly curbed the dollar's upward momentum since mid-August, keeping the short-term market bias "neutral to bearish."

The immediate support level for the US dollar index is 97.253, the low of September. If it can clearly break below this level, it may further decline to 97.109; if the consumer price index data further strengthens the expectation of "continued easing by the Federal Reserve", it may even fall to the 96.377 range.

If the Consumer Price Index (CPI) unexpectedly exceeds expectations, the US Dollar Index will turn its attention to 98.635 and 98.834 after breaking through 98.317; the high of the broader range of 99.320 will become the next resistance area.

The US Dollar Index is currently consolidating in a range of 97.253 to 98.834, with the 50-day moving average acting as the immediate pivot point. The Consumer Price Index (CPI) will be the catalyst that determines the direction of the US Dollar Index, but traders should expect a breakout only if prices clearly break out of this range.