US Dollar Index rises to near 101.00 following Fed Powell remarks to lower rates gradually

The US Dollar Index advances as the Fed’s Powell said that the central bank will lower interest rates ‘over time.’
CME FedWatch Tool suggests a 61.8% probability to a 25 basis point rate cut by the Fed in November.
US ISM Manufacturing PMI is expected to improve to 47.5 in September, from the previous 47.2 reading.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against other six major currencies, extends its gains for the second successive day. The DXY trades around 100.80 during the Asian hours on Tuesday. The US Dollar (USD) gains ground following the latest speech from the Federal Reserve (Fed) Chairman Jerome Powell.

Fed Chair Powell stated the central bank is not in a hurry and will lower its benchmark rate ‘over time.’ Powell added that the recent 50 basis point interest rate cut should not be seen as an indication of similarly aggressive future actions, noting that upcoming rate changes are likely to be more modest.

The CME FedWatch Tool indicates that markets are assigning a 61.8% probability to a 25 basis point rate cut by the Federal Reserve in November, while the likelihood of a 50-basis-point is 38.2%, down from 53.3% a day ago.

However, last week’s US Core Personal Consumption Expenditures (PCE) Price Index increased by 0.1% MoM in August, falling short of the expected 0.2% rise, aligning with the Federal Reserve's outlook that inflation is easing in the US economy. This reinforced the possibility of an aggressive rate-cutting cycle by the Fed.

Traders would likely observe US manufacturing data including ISM Manufacturing PMI later in the North American session, which is expected to improve to 47.5 in September, from the previous 47.2 reading. This report may provide a reliable outlook on the state of the US manufacturing sector.

Economic Indicator

ISM Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.

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