**US Dollar Weekly Forecast: Don’t Overprice a September Rate Cut**
*Based on an analysis by Yohay Elam, FXStreet*
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### Introduction
The landscape for the US Dollar (USD) is nuanced as market participants assess the Federal Reserve’s path amid shifting economic signals. With speculation mounting over the prospect of a September rate cut, it is crucial to avoid overpricing dovish expectations. Rather than succumbing to rate-cut predictions prematurely, traders should thoroughly evaluate the mixed data, shifting central bank rhetoric, and evolving inflation trends that underpin the world’s reserve currency.
This article dissects the current environment for the US Dollar, analyzing key fundamental and technical drivers, and outlines the risks of overextending dovish sentiment over the coming months.
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### Federal Reserve: The Center of Attention
The Federal Reserve’s monetary policy remains the dominant force steering the US Dollar. Market attention is skewed toward the likelihood of rate cuts in 2024, particularly pegging expectations on a potential move in September. However, the recent data flow and policy signals suggest caution is warranted when betting aggressively on a dovish pivot.
#### Current Federal Reserve Stance
– The Federal Open Market Committee (FOMC) has maintained the policy rate steady at 5.25% – 5.50% since July 2023.
– Recent FOMC minutes and Chair Jerome Powell’s statements reflect the Fed’s commitment to a data-dependent approach.
– Policymakers have emphasized that rates will stay restrictive until inflation convincingly converges toward target.
#### Market Expectations and Mispricing
– The market currently prices in about a 60% chance of a Fed rate cut by September.
– Futures suggest cumulative rate cuts of around 50 basis points by year-end 2024.
– However, the Fed’s own projections, as articulated in the dot plot, indicate only one or possibly two cuts in total this year.
– Historically, markets tend to overanticipate dovish pivots, often repositioning after a hawkish reality check provided by robust US data or commentary from Fed officials.
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### Economic Fundamentals: Mixed but Resilient
Underlying economic data continue to underpin the US Dollar’s resilience and argue against aggressive rate-cut positioning.
#### Labor Market
– US nonfarm payrolls have remained solid, with the unemployment rate hovering near historic lows at 4.0%.
– Weekly initial jobless claims remain subdued.
– Wage gains are moderating, but the labor market is far from signaling pronounced weakness.
– The Job Openings and Labor Turnover Survey (JOLTS) indicates a gradual cooling, aligning more with a soft-landing scenario than a significant downturn.
#### Inflation Dynamics
– Headline Consumer Price Index (CPI) inflation has slowed to around 3.3% year-on-year.
– Core CPI remains sticky at approximately 3.4%.
– Services inflation, led by shelter and healthcare, is proving stubborn, while goods inflation has stabilized.
– The Personal Consumption Expenditures (PCE) index, the Fed’s preferred metric, improved marginally but still exceeds the 2% goal.
#### Growth and Consumption
– The US economy has exceeded expectations, with Q1 2024 annualized growth at 1.4%.
– Retail sales and consumer spending data reflect moderate expansion in personal consumption.
– Manufacturing surveys (ISM PMI) are mixed, but the services sector continues to expand.
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### The Global Context: US Outperformance
Comparative analysis with other major economies reinforces the case for US Dollar resilience. The global economic environment continues to favor the greenback over its peers.
#### Europe and the Euro
– The Eurozone is battling tepid growth, with stagnation in Germany and France.
– Inflation pressures have faded more rapidly than in the US.
– The European Central Bank (ECB) has already begun cutting rates, increasing monetary policy divergence.
– The euro struggles as a result, boosting USD strength.
#### Japan and the Yen
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