Despite the US Consumer Price Index (CPI) data for September falling short of expectations on Friday (October 24), the US Dollar Index (DXY) remained range-bound, with only a slight decline. The relatively restrained price action suggests traders are increasingly cautious ahead of next week's Federal Reserve meeting. The inflation data further fueled market expectations of a shift toward easing policy from the Fed.



Narrow range fluctuations reflect market uncertainty about the Fed's outlook

Initial support for the US dollar index is seen at 98.714, a key Fibonacci retracement level that has repeatedly provided support in recent trading sessions. Resistance remains at this week's high of 99.139. The index's oscillation between these two levels reflects traders' hesitation as they digest the CPI data and recalibrate their expectations for short-term monetary policy.

If the US dollar index falls below 98.714, it may trigger a pullback, looking down at the 50% Fibonacci retracement level of 98.238; but from the overall market perspective, the focus is more on the 50-day moving average (around 98.113) - last week's low of 98.030 further highlights the importance of this point as a short-term directional turning point.

U.S. Treasury yields fall amid expectations of slower inflation

Following the release of the CPI report, U.S. Treasury yields across all maturities declined. As weak inflation data tempered market concerns about interest rate hikes, the 10-year Treasury yield fell to 3.966%, falling below the 4% mark. The 2-year and 30-year Treasury yields also declined, closing at 3.442% and 4.561%, respectively. This decline in yields reflects the bond market's belief that the Federal Reserve is likely to cut interest rates in the near term.

September CPI data fell short of expectations

The US headline CPI rose just 0.3% month-over-month in September, below expectations for a 0.4% increase. The year-over-year increase remained at 3%, also below expectations for a 3.1% increase. The core CPI, which excludes food and energy prices, rose 0.2% month-over-month and 3% year-over-year, both below expectations. The CPI data, delayed due to the government shutdown, suggests that current price pressures have eased significantly.

The probability of a rate cut at the Federal Reserve meetings in October and December has increased significantly

Market participants quickly adjusted their expectations for the Fed's policy actions. The Chicago Mercantile Exchange (CME) FedWatch tool indicates a near 100% probability of a 25 basis point rate cut at the upcoming October Fed meeting, with the market anticipating a drop in the federal funds rate to a range of 3.75%-4.00%. The probability of a second rate cut in December jumped to 98.5%, further reinforcing the view that the Fed will adopt a more accommodative stance by year-end.

Market Outlook: If the Fed confirms its easing policy, the US dollar index may fall further


(Source of US Dollar Index daily chart: Yihuitong)

With inflation slowing and the probability of interest rate cuts increasing, downside risks are accumulating for the US dollar index. While technically, the index still has the potential to rebound above 99.139, short-term market sentiment is bearish—a bearish outlook unlikely to change unless the Federal Reserve sends hawkish signals at its meeting next week.