**USD Slides Amid Speculation of Fed Policy Shift: Markets Weigh Weak Economic Signals**
*Original story credit: Mitrade. Adapted and expanded for informational purposes.*
The US dollar registered a significant decline on Wednesday, August 21, 2024, falling from a near two-month high following the release of weaker-than-expected US economic data. This development has fueled further market speculation that the Federal Reserve may be nearing the end of its aggressive monetary tightening cycle. Investors are now increasingly anticipating potential interest rate cuts in 2025 as signs of economic deceleration emerge. Let’s explore the recent Forex market dynamics, economic data, the reaction of key currencies, and monetary policy outlooks across the globe.
## US Dollar Experiences Pressure Amid Soft Data
The dollar index (DXY), which tracks the performance of the USD against a basket of six major currencies, fell by 0.27 percent on the day to around 104.90. This slide came in response to poor economic indicators, particularly focusing on the performance of the housing market and industrial production. The dollar’s earlier strength was buoyed by rising Treasury yields and a hawkish Fed tone, but recent figures suggest headwinds for the US economy.
### Key Economic Data Driving Dollar Weakness:
– **Housing Starts (July 2024)**:
– Actual: 1.45 million units (annualized)
– Forecast: 1.47 million units
– Prior: 1.38 million units
– Although there was a monthly improvement, the data missed expectations, marking a lukewarm recovery in residential construction.
– **Building Permits (July 2024)**:
– Actual: 1.44 million units
– Forecast: 1.46 million units
– This metric also disappointed, signaling continued fragility in the housing sector, which is sensitive to interest rate conditions.
– **Industrial Production**:
– Unexpected contraction in July, with manufacturing output declining by 0.4 percent month-over-month.
– This contrasts with forecasted growth, suggesting that higher borrowing costs are beginning to bite.
These figures, coupled with previous soft retail sales and employment readings, reinforced concerns that the Federal Reserve’s restrictive policy stance may have overshot its neutral point, risking a deeper slowdown.
## Federal Reserve Policy Outlook – Turning Point Ahead?
Markets are now reassessing the trajectory of the Federal Reserve’s rate path. While inflation remains above the Fed’s 2 percent target, several key indicators show signs of moderation.
### Federal Reserve Indicators:
– **Core PCE Inflation**:
– Still above target, but trending downward over the past few months
– Latest reading: 2.7 percent year-over-year
– **Labor Market**:
– Unemployment rate ticked up to 4.0 percent in July
– Job openings and hiring activity are cooling
– **Growth Forecasts**:
– Q3 GDP growth estimates have been revised downward by several economists
– Increased likelihood of a “soft landing” or even a mild recession
Given this backdrop, traders in interest rate futures markets now place a 70 percent probability on the Federal Reserve leaving rates unchanged at the upcoming September FOMC meeting. Moreover, bets on a rate cut in the first half of 2025 have increased, reflecting the belief that inflation may continue to ease without additional tightening.
Federal Reserve Chairman Jerome Powell is set to speak at the upcoming Jackson Hole economic symposium on August 25. His remarks will be crucial in shaping near-term market expectations. Any dovish signals could further weaken the dollar and support risk-on sentiment.
## Global Currency Movements: Mixed Performance
Changes in the USD created ripple effects throughout the forex markets. Key currencies responded in different ways, reflecting localized fundamentals and monetary policy positions.
### Euro – Some Relief Above 1.09
– EUR/USD rose to 1.0905, gaining 0.35 percent on the day
Read more on USD/CAD trading.