Key points:
Trader sentiment has shifted amid media reports and new economic data, hinting that the Federal Reserve might lean toward a more aggressive interest rate cut.
Market participants, guided by the CME FedWatch tool, have increased their expectations for a 50-basis-point cut, now pricing in a 43% chance, up from 27% just a day earlier.
See: Dollar index trading at 100.715 as seen on the VT Markets app.
So what do the charts say? The U.S. dollar index (DXY) has retreated from its recent highs, with the current level around 100.67. The trend shows a decline of 1.06%, signaling bearish sentiment as traders recalibrate expectations for the upcoming Federal Reserve rate decision. The 4-hour chart shows a key support level at 100.38, which has held firm since late August, providing a potential floor for the dollar’s downward move.
Technical indicators point to weakening momentum. The moving averages (MA 5,10,30) are converging, while the MACD histogram has crossed into negative territory, indicating a bearish trend. This suggests further downside risk if the dollar breaches the 100.38 support zone.
The probability of a 25-basis-point cut now stands at 57%, reflecting mixed market sentiment. This shift follows higher-than-expected U.S. jobless claims, which have added to uncertainty about the Fed’s policy direction. Recent reports from the Wall Street Journal have also hinted at indecision within the Federal Reserve regarding the pace of rate cuts, further contributing to market volatility.
If the support holds, the dollar may see a short-term rebound; however, weaker economic data could drive further declines in anticipation of more aggressive rate cuts from the Fed.
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Conflicting economic signals heighten uncertainty for the Federal Reserve
Mixed economic reports this week added to the uncertainty. Layoffs remain low, despite signs of a slowing labour market, while producer prices in August rose slightly above forecasts. These developments suggest that the Federal Reserve faces a complex challenge.
ECB rate cut boosts euro as dollar weakens further
Meanwhile, the European Central Bank (ECB) lowered interest rates on Thursday.
ECB President Christine Lagarde tempered expectations of further cuts in the near term, supporting the euro’s rise against the dollar, with EUR/USD standing at $1.1083 in early trading on Friday. The dollar index, which compares the dollar against six currencies including the euro, fell to 101.11.
Sterling was also 0.1% higher at $1.31415 as markets await the Bank of England’s (BoE) policy meeting. With an 80% chance that rates will remain on hold, traders remain cautious after the BoE’s 25-basis-point rate cut in August.
Given the mixed economic data and growing rate cut expectations, the dollar may face further downside pressure if the Federal Reserve opts for the larger 50-basis-point cut. However, persistent inflation concerns could keep the Fed cautious, leading to more modest rate reductions in the coming months. Markets will closely watch next week’s central bank meetings for further direction.
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