US Dollar Weekly Forecast: Fed rate cut bets seen ruling the sentiment

• The USD Index (DXY) traded with a gradual downside bias this week.
• The likelihood of a potential rate cut by the Fed in September lost some traction.
• US inflation gauged by the PCE rose above estimates in March.
• Markets’ attention now shifts to the FOMC event and the NFP.

A modest weekly retracement saw the Greenback reverse two consecutive advances, motivating the USD Index (DXY) to retreat further from yearly peaks at around 106.50 recorded earlier in the month. 

The weekly performance of the US Dollar (USD) mirrored investors' reactions to the alternating trends in bets regarding the probable timing of the start of the Federal Reserve’s (Fed) easing programme.

The possibility of a rate adjustment at the September 18 meeting appears to have lost momentum, especially given the persistently sticky US inflation figures recently reported, as reflected in both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) data for March. 

The unexpected slowdown in deflationary pressures, coupled with the unabated tightness of the labour market, not only confirms the ongoing strength of the economy but also suggests that the Fed may maintain tighter policies for longer. 

Furthermore, the likelihood of the Fed starting an easing cycle in September has decreased significantly to around 45%, according to the CME Group’s FedWatch Tool. 

The Greenback’s performance for the week also coincided with US yields stabilizing near recent multi-month highs across different maturity periods, against a macro environment that indicates fewer interest rate cuts for the rest of the year. 

Despite the Fed’s blackout period, it is worth recalling the latest comments from Fed officials, who have been vocal about prolonging the current restrictive stance. That said, Atlanta Federal Reserve Bank President Raphael Bostic suggested a potential move by year-end. His colleague from the New York Fed, John Williams, emphasized the positive economic data and the need for rate adjustments based on the data, while FOMC Governor Michelle Bowman expressed uncertainty about whether interest rates are sufficiently high to address inflation concerns. 

Those views from Fed policymakers matched Chairman Jerome Powell's recent remarks, indicating no rush to initiate interest rate cuts. 

Regarding interest rate trajectories among G10 central banks and inflation dynamics, it's anticipated that the European Central Bank (ECB) may cut interest rates during the summer, possibly followed by the Bank of England (BoE). However, both the Federal Reserve and the Reserve Bank of Australia (RBA) are expected to start easing later this year, probably in the fourth quarter. Despite a recent policy rate hike, the Bank of Japan (BoJ) remains an outlier. 

DXY technical outlook 

In case the downside pressure picks up pace, the USD Index (DXY) is expected to meet the next contention zone at the key 200-day Simple Moving Average (SMA) at 104.07, which precedes the April 9 low at 103.88. The breakdown of this level reveals the provisional 100-day SMA at 103.73, prior to the March low of 102.35 (March 8). A deeper slide might lead to a test of the December low of 100.61 (December 28), which is ahead of the psychological 100.00 barrier and the 2023 bottom of 99.57 (July 14).

On the other hand, bulls should look to revisit the 2024 top of 106.51 (April 16). Surpassing this level may inspire market players to consider a visit to the November high at 107.11 (November 1), just ahead of the 2023 peak at 107.34 (October 3).

Looking at the bigger picture, the constrictive tone is predicted to remain unchanged while DXY trades above the 200-day SMA.