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DXY Price Chart (July 20 - July 23), Source: TradingView
The Dollar Index (DXY) declined by -2.2% last week, settling at its lowest level since April 2022. The index abandoned a previous important support level at 101, sliding below the 100 level, which acts as a significant psychological level for prices. This decline came after the release of economic data that showed a decline in concerns about consumer prices. As a result, this raised expectations that the Fed will continue its pause in interest rates.
The Consumer Price Index slowed to less than expected in June at 3% on an annual basis, the lowest level since March 2021. The Producer Price Index also fell less than expected at 0.2%. With food and energy prices excluded, core CPI came in at 4.8% y/y, indicating that core inflation is still far from the Fed's target of 2%.
Ahead of the Fed’s next meeting later this month, markets are awaiting the Fed's moves to see whether they will be in line with the cooler CPI data, or with the hotter core CPI numbers. Traders should also note that rising oil prices for the third consecutive week may also contribute to inflationary pressures over the upcoming period.
As a result, it won’t be easy to build clear expectations about the direction of interest rates in the Fed’s upcoming meetings, especially since stating that it will be flexible in dealing with monetary policy. However, it is clear that the performance of the US dollar will be considered negative as long as the greenback remains below 101 levels. Markets are also preparing for the end of the Fed’s hiking cycle, with only one or two potential hikes left in the central bank’s next meetings.
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