The U.S. dollar has seen a significant drop following the release of U.S. inflation data. This data suggested a softer inflationary environment, which increased speculation about upcoming interest rate cuts by the Federal Reserve. Consequently, risk-sensitive currencies like the Australian and New Zealand dollars have strengthened.
The Australian dollar surged to a three-week high, while the British pound reached a two-week peak after its best performance since April. Meanwhile, the New Zealand dollar remained near a four-week high as traders await the Reserve Bank of New Zealand's (RBNZ) policy decision. The market is divided on whether the RBNZ will opt for a rate cut, adding further uncertainty to the dollar's outlook.
Market expectations have shifted significantly, with traders now pricing in a higher likelihood of a substantial 50 basis point rate cut by the Federal Reserve. This shift comes as the U.S. producer price index indicated softer inflation, reinforcing the possibility of rate cuts as soon as September.
Analysts from the Commonwealth Bank of Australia predict that the dollar may remain in a holding pattern until the release of the U.S. consumer price index (CPI). If the core CPI increases minimally, the market is likely to double down on expectations for significant rate cuts by Federal Reserve. Conversely, if the CPI increases more than expected, the market might temper its rate cut predictions.
The dollar index, which measures the greenback against six major currencies, held steady after its recent decline. Sterling remained strong, buoyed by positive UK employment data, while the euro stayed flat against the dollar. The yen and the Australian dollar also showed minimal changes, reflecting market consolidation. As markets await further economic indicators, the dollar's future trajectory remains uncertain.
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The U.S. dollar weakens as softer inflation data fuels speculation about Federal Reserve rate cuts. Analysts predict further dollar weakness.
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