- Dollar forecast: September Fed cut is now the base case and dollar bulls may find less incentive to hold longs unless incoming data turns unexpectedly hawkish
- If the Fed moves ahead with back-to-back cuts, the policy rate differential with peers could narrow quickly, weighing on USD against higher-yielding currencies
- Dollar index could test July lows sub 96.37 if selling continues
The US dollar has sold off on the back of today’s inflation data, which landed pretty much where the market had expected, with tariffs still being quietly swallowed up in corporate profit margins rather than passed on to consumers. That gives the Fed room to respond to softer jobs data and, quite possibly, start trimming interest rates from September. That’s what markets are betting on today, with speculation about two further cuts also on the ascendency. Trump’s social media bashing of Powell continued, and this didn’t help the greenback either, further weighing on the US dollar forecast.
Inflation stays tame
In case you missed it, July’s CPI figures were hardly a shocker: headline inflation was up 0.2% month-on-month and 2.7% year-on-year, while core inflation ticked up 0.3% m/m (3.1% YoY). Energy prices slipped by 1.1%, food was flat, and even the sectors most exposed to tariffs saw modest gains. Core goods excluding autos rose a modest 0.2% suggesting that companies are continuing to absorb most of the extra costs associated with tariffs. That said, services were a bit perkier, with airline fares, for example, surging 4% and medical care costs rising 0.7%. But that was offset by shelter costs rising just 0.2% on the month as falling house prices and cooling rents are doing a lot of heavy lifting here.
Markets are therefore betting that despite higher tariffs, inflation is unlikely to accelerate sharply beyond a temporary rise this autumn. And if the economy cools further, in particular the jobs market, CPI inflation could even slide below the 2% target next year.
How will the Fed respond?
Until the Fed’s next meeting we will have one more jobs and inflation report, as well as several other macro releases, to look forward to. But following a weak jobs report and those big revisions in the months prior, and today’s inline CPI, the Fed looks increasingly likely to pull the trigger on a September rate cut, and potentially followed by 25bp trims in both October and December. For the dollar, that could mean a softer profile into year-end — unless other major central banks move even faster to ease.
Dollar forecast: DXY resumes slide
The dollar index chart could be heading down to test the July lows near 96.37 if it now breaks the support trend of what looks like a bear flag pattern. This trend line comes in around the 97.90-97.80 area, making it a key technical zone to watch. Below that, 97.00 could be an interim target ahead of new 2025 lows. Resistance is seen at 98.95. This bearish dollar forecast will end, at least from a technical viewpoint, should the DXY break above key resistance in the 100.00-100.15 range.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
