Dollar Outlook: Traders focus on Fed rate cuts, the US dollar index rises slightly before retreating
2025-09-13 01:27:24
The US Dollar Index (DXY) retreated after a slight rise during US trading on Friday (September 12), remaining unchanged from its opening price, closing at 97.592, up 0.07%, and projected to decline for the second consecutive week. This slight rebound follows a sharp drop on Thursday, driven by a combination of weak labor market data and a slight pickup in inflation, prompting a recalibration of market expectations regarding Federal Open Market Committee (FOMC) policy.
From a technical perspective, the index is currently trading below its 50-day moving average (98.12), which further strengthens its short-term bearish bias.
Mixed U.S. data shifts rate cut expectations
Recent economic data has sent conflicting signals. Initial unemployment claims surged to their highest level since October 2021, marking the largest weekly increase in four years, suggesting a cooling labor market. Meanwhile, the Consumer Price Index (CPI) rose 2.9% year-over-year in August—the largest monthly increase since January—while the core CPI (which excludes food and energy prices) rose to 3.1%. While both figures are above the Federal Reserve's 2% target, they were generally in line with market expectations.
Adding to the uncertainty, US consumer confidence plummeted in September. The preliminary reading of the University of Michigan's Consumer Sentiment Index fell to 55.4, the lowest level since May. This was below both the expected reading of 58.1 and August's reading of 58.2. This decline suggests weakening confidence among US households entering the fourth quarter, heightening market concerns about the sustainability of consumer spending.
The confluence of a weak labor market, declining consumer confidence, and persistently high inflation complicates the Federal Reserve's policy path. Federal funds rate futures currently indicate a near-certainty of a 25 basis point rate cut at the September 17th FOMC meeting, while expectations for a 50 basis point cut have diminished. Traders are increasingly anticipating a more moderate pace of easing by the end of the year and tempering expectations for larger rate cuts.
U.S. Treasury yields rebounded after the data
As markets reassess the relationship between inflation and the labor market, U.S. Treasury yields reversed Thursday's decline. The 10-year Treasury yield rose 4.5 basis points to 4.068%; the 2-year Treasury yield rose 1.62 basis points to 3.562%; and the 30-year Treasury yield rose to 4.69%. This broad-based increase suggests that even with weakening labor market indicators, investors are adjusting their positions for persistent inflation, putting pressure on policymakers tasked with the dual mandate of stable prices and achieving full employment.
Cross-border currency fluctuations reflect policy divergences among central banks
After the European Central Bank (ECB) kept interest rates unchanged at 2% and signaled a more neutral policy stance, the euro fell slightly to $1.1736 during intraday trading, reducing the probability of another ECB rate cut this cycle. Following statements from the United States and Japan opposing disorderly fluctuations in the foreign exchange market, the dollar rose 0.27% against the yen to 147.599. Furthermore, the UK's July GDP data showed economic stagnation. The pound fell 0.03% against the dollar to $1.3566, further dampening short-term market sentiment.
Market Outlook: US dollar index shows cautious trend before FOMC meeting
(Source of US Dollar Index daily chart: Yihuitong)
As the US dollar index (DXY) remains below its 50-day moving average and market expectations for a rate cut remain stable around a "25 basis point cut", short-term exchange rate trends will depend on the policy guidance released by the Federal Reserve next week.
If there are large differences of opinion within the FOMC, or if a hawkish (tightening) signal is released, the US dollar index may be supported; but if a dovish (loosening) signal is released - especially if there are concerns about the labor market - the upside of the US dollar index may be limited.
Market volatility is expected to increase as the market digests the latest "dot plot" (a chart of Federal Reserve officials' expectations for the future interest rate path) and the content of Federal Reserve Chairman Powell's press conference.
From a technical perspective, the index is currently trading below its 50-day moving average (98.12), which further strengthens its short-term bearish bias.
Mixed U.S. data shifts rate cut expectations
Recent economic data has sent conflicting signals. Initial unemployment claims surged to their highest level since October 2021, marking the largest weekly increase in four years, suggesting a cooling labor market. Meanwhile, the Consumer Price Index (CPI) rose 2.9% year-over-year in August—the largest monthly increase since January—while the core CPI (which excludes food and energy prices) rose to 3.1%. While both figures are above the Federal Reserve's 2% target, they were generally in line with market expectations.
Adding to the uncertainty, US consumer confidence plummeted in September. The preliminary reading of the University of Michigan's Consumer Sentiment Index fell to 55.4, the lowest level since May. This was below both the expected reading of 58.1 and August's reading of 58.2. This decline suggests weakening confidence among US households entering the fourth quarter, heightening market concerns about the sustainability of consumer spending.
The confluence of a weak labor market, declining consumer confidence, and persistently high inflation complicates the Federal Reserve's policy path. Federal funds rate futures currently indicate a near-certainty of a 25 basis point rate cut at the September 17th FOMC meeting, while expectations for a 50 basis point cut have diminished. Traders are increasingly anticipating a more moderate pace of easing by the end of the year and tempering expectations for larger rate cuts.
U.S. Treasury yields rebounded after the data
As markets reassess the relationship between inflation and the labor market, U.S. Treasury yields reversed Thursday's decline. The 10-year Treasury yield rose 4.5 basis points to 4.068%; the 2-year Treasury yield rose 1.62 basis points to 3.562%; and the 30-year Treasury yield rose to 4.69%. This broad-based increase suggests that even with weakening labor market indicators, investors are adjusting their positions for persistent inflation, putting pressure on policymakers tasked with the dual mandate of stable prices and achieving full employment.
Cross-border currency fluctuations reflect policy divergences among central banks
After the European Central Bank (ECB) kept interest rates unchanged at 2% and signaled a more neutral policy stance, the euro fell slightly to $1.1736 during intraday trading, reducing the probability of another ECB rate cut this cycle. Following statements from the United States and Japan opposing disorderly fluctuations in the foreign exchange market, the dollar rose 0.27% against the yen to 147.599. Furthermore, the UK's July GDP data showed economic stagnation. The pound fell 0.03% against the dollar to $1.3566, further dampening short-term market sentiment.
Market Outlook: US dollar index shows cautious trend before FOMC meeting
(Source of US Dollar Index daily chart: Yihuitong)
As the US dollar index (DXY) remains below its 50-day moving average and market expectations for a rate cut remain stable around a "25 basis point cut", short-term exchange rate trends will depend on the policy guidance released by the Federal Reserve next week.
If there are large differences of opinion within the FOMC, or if a hawkish (tightening) signal is released, the US dollar index may be supported; but if a dovish (loosening) signal is released - especially if there are concerns about the labor market - the upside of the US dollar index may be limited.
Market volatility is expected to increase as the market digests the latest "dot plot" (a chart of Federal Reserve officials' expectations for the future interest rate path) and the content of Federal Reserve Chairman Powell's press conference.
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