**US Dollar Weekly Forecast: Don’t Overprice a September Rate Cut**
*By Pablo Piovano | Source: FXStreet.com*
—
The US Dollar (USD) remains at center stage as financial markets digest the latest shifts in macroeconomic data, Federal Reserve communications, and evolving market expectations for interest rates. The upcoming week will be particularly significant, with traders focused on inflation metrics, growth signals, and Fed commentary to evaluate the likelihood of a September rate cut. The growing dissonance between market pricing and central bank guidance is creating an intriguing environment for the greenback. Below, we examine the key drivers impacting the dollar’s outlook, the probability landscape for Federal Reserve policy, and tactical implications for forex traders.
## Recent Developments: Resilience Amid Uncertainty
In recent weeks, the US Dollar Index (DXY) has exhibited notable resilience, rebounding even as expectations for Federal Reserve easing have waxed and waned. This strength can be attributed to several factors:
– **Stronger-than-expected economic indicators.** US labor market data, particularly Nonfarm Payrolls and unemployment claims, have largely surprised to the upside, suggesting ongoing economic momentum.
– **Sticky inflation.** Both headline and core inflation have proven less responsive to previous tightening measures, reinforcing the view that the Fed needs more evidence before committing to cuts.
– **Cautious Federal Reserve communication.** Speeches and minutes from the FOMC have indicated a lack of urgency to cut, with officials emphasizing data dependence.
– **Interest rate differentials.** Despite some softness, US yields remain relatively elevated compared to G10 peers, underpinning demand for the dollar.
## Inflation Remains in Focus
Inflation readings continue to command outsized attention. Last week’s data showed that while price growth is coming off its highs, disinflationary progress is uneven. The Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) data point to ongoing pressure in services and shelter:
– **Shelter inflation.** This component has moderated only slowly, contributing to stickier overall price indices.
– **Core services.** Wage growth and service-sector inflation persist, reflecting sustained demand.
– **Energy and food.** Volatile but with less impact on underlying inflation trends.
For markets, the key takeaway is that the Fed can afford to be patient, waiting for more sustained evidence of inflation converging to its 2 percent target.
## Federal Reserve Guidance vs. Market Pricing
Perhaps the most significant driver for the greenback recently has been the divergence between actual central bank communication and the aggressive rate-cut expectations priced in by financial markets.
### Federal Reserve Position:
– **Cautiously neutral.** Fed officials have signaled that while further hikes are likely off the table, imminent cuts are not guaranteed.
– **Data dependency.** Any change in policy will hinge on inflation and labor market outcomes.
– **Higher-for-longer messaging.** Powell and others have repeated that above-trend growth or sticky inflation could warrant keeping current rates in place for longer.
### Market Pricing:
– **September cut expectations.** As of this writing, futures markets are pricing in about a 60 to 65 percent probability of a 25 basis-point cut at the September FOMC meeting.
– **Multiple cuts in 2024.** Some pricing suggests as many as two or three cuts by year end.
– **Potential overpricing.** These expectations are running ahead of where the Fed itself has guided, creating downside risk for dovish trades.
## Key Data in The Week Ahead
The coming week brings several high-impact economic releases with potential to shift the dollar’s trajectory:
– **CPI and PPI.** Updated inflation figures will be scrutinized for signs of softening in core and services components.
– **Retail sales.** Consumer spending remains a pillar of growth, and any surprises could influence rate expectations.
– **University of Michigan consumer sentiment.** A key gauge
Read more on GBP/USD trading.