*Adapted from the original article by Kevin Buckland, via Reuters on TradingView*
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**U.S. Dollar Steady Amid Growing Expectations for September Fed Rate Cut**
The U.S. dollar held steady in early Asian trading on Monday as market participants awaited critical U.S. economic data, including core inflation figures later this week. At the same time, increasing expectations that the Federal Reserve will reduce interest rates as early as September weighed on the currency’s upward momentum.
The cautious mood in the foreign exchange markets reflects the broader uncertainty surrounding the direction of U.S. monetary policy. Investors and analysts alike are closely analyzing every economic indicator to determine if inflation is cooling enough for the Federal Reserve to begin easing policy.
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**Dollar Index Holds Position Despite Yield Pressures**
The dollar index, which measures the greenback against a basket of major peers, was largely unchanged at 105.23 early Monday in Asia. This came after the index saw a modest decline of 0.21% on Friday. For the whole of last week, it dipped by 0.88% — the most significant weekly drop since the end of 2023.
– Benchmark 10-year Treasury yields were also down to a two-month low of 4.25% on Friday
– Declining yields are typically bearish for the dollar, as they reduce the currency’s interest rate advantage relative to peers
The move follows a series of weaker-than-expected U.S. economic reports, which have shifted market sentiment toward anticipating a rate cut from the Federal Reserve.
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**Core PCE Data: The Next Market Catalyst**
Investors are now turning their attention toward Friday, when the U.S. Commerce Department will release core Personal Consumption Expenditures (PCE) data — one of the Fed’s preferred inflation gauges.
The forecast among economists and analysts surveyed by Reuters is for a 0.2% increase in core PCE for May. Confirmation of this consensus would mark a second month of moderating inflation, adding to the case for potential monetary policy easing.
According to Tony Sycamore, a market analyst at IG, the dollar’s immediate trajectory will be heavily influenced by the outcome of the core PCE report.
“If PCE prints in line or is softer than expectations, it should underpin current thinking that the Fed will cut in September,” said Sycamore. However, he added a note of caution: “If it comes in hot — which I doubt — that will probably shake that outlook.”
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**Fed Powell Maintains a Cautious Stance**
Federal Reserve Chair Jerome Powell has reaffirmed a cautious and data-dependent approach to monetary policy during a panel discussion last week. Powell emphasized that while there is evidence of easing inflation, the Fed still needs to see more data before making its next move.
– The Fed held interest rates steady during its most recent policy meeting
– Policymakers signaled just one rate cut this year in their projections, though markets anticipate more
Futures traders are currently pricing in a 66% chance that the Fed will reduce rates by 25 basis points in September, according to the CME FedWatch Tool. That’s a significant increase from a 50% probability just one week ago.
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**Market Pricing Tells the Story**
Market expectations are shifting rapidly, as seen in the pricing of interest rate futures and options.
– Fed funds futures now suggest nearly 50 basis points of total rate cuts in 2024
– That implies at least two quarter-point reductions by year-end, assuming the central bank moves in September
This view is shaped by recent economic data showing modest job growth, stable consumer spending, and signs that inflation is not accelerating. If Friday’s PCE data conforms to or undershoots analyst predictions, it could entrench market sentiment even further.
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**Currency Markets Reflect Shifting Sentiment**
Foreign exchange markets have broadly mirrored the adjustment in U.S. rate expectations and have shown a mixed performance for the dollar across various currency pairs.
Read more on EUR/USD trading.