**US Dollar Weekly Forecast: Don’t Overprice a September Rate Cut**
*By Pablo Piovano, originally published on FXStreet*
**Introduction**
As investors approach the mid-point of 2024, the US Dollar (USD) narrative remains dominated by debates over the Federal Reserve’s monetary policy, macroeconomic data resilience, and shifting global risks. The past week has been telling: the US Dollar Index (DXY) maintained its strength, defying bets on imminent Fed easing. However, market participants should think twice before aggressively pricing in a September rate cut. The following analysis explores the latest drivers of the greenback, reviews key data, and outlines what the coming weeks could bring for USD pairs.
—
**Macro Backdrop: US Economy Resilience and Fed Patience**
US economic data continues to surpass expectations, highlighting strong job creation, robust consumer spending, and an inflation profile still far from the Fed’s 2 percent target. This resilience complicates the Federal Reserve’s path forward. Policymakers remain alert to the risks of cutting rates too soon or too aggressively, particularly after past experiences where premature easing reignited inflationary pressures.
Key Points on the US Macro Environment:
– **Inflation Continues Above Target:** While inflation is off its peak, core price pressures remain sticky, reflected in recent Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) prints.
– **Labor Market Strength:** Monthly Nonfarm Payrolls (NFP) data points to continued job growth, with unemployment hovering near historic lows.
– **Retail Sales and Consumption:** Consumer spending remains robust, a significant source of strength for the US economy.
– **Business Activity:** Manufacturing surveys (PMIs) show modest expansion, and service sector activity, while cooling, is still in expansion territory.
This backdrop underlines the Fed’s reluctance to signal or deliver a series of swift rate cuts.
—
**Federal Reserve Stance and Market Expectations**
The June Federal Open Market Committee (FOMC) meeting reinforced the Fed’s cautious approach. Fed Chair Jerome Powell and other committee members have stressed the need to see more “good data” before reducing rates. The so-called “Dot Plot” projections signaled just one rate cut this year, in contrast to prior market hopes for two or more.
Themes from Recent Fed Communications:
– **Data Dependence:** The Fed is closely monitoring incoming inflation and jobs numbers. Any deviation from the current softening inflation trend or labor strength could further delay cuts.
– **No Urgency:** Policymakers believe that with inflation still above target and the labor market healthy, there is little reason to rush into easing.
– **Global Comparisons:** The US is outperforming its major peers, especially the Eurozone, UK, and China, which face stagnating growth and softer inflation.
**Market Expectations:**
While the market had been pricing in up to two cuts for 2024, more recent Fed language and strong data have narrowed these expectations. Futures markets now reflect just one cut as the most likely scenario, with a probability of a September move still well below certainty.
—
**US Dollar Index Performance**
Against this evolving policy and macro backdrop, the US Dollar Index (DXY) remains supported near multi-week highs, hovering around the 106 mark at the time of writing. The DXY’s persistent strength is driven by both US data surprises and relative weakness elsewhere.
Key Factors Supporting the Dollar:
– **Yield Differentials:** Higher US rates relative to peers keep portfolios parked in the dollar.
– **Safe Haven Demand:** Lingering geopolitical risks, including developments in the Middle East and Eastern Europe, support the currency’s safe haven status.
– **Global Underperformance:** Other major economies, particularly the Eurozone, continue to lag in growth, diminishing the appeal of alternatives to the USD.
—
**Implications for Major Pairs**
The dollar’s resilience is evident across major pairs, reflecting both domestic fundamentals and international divergences.
1.
Read more on GBP/USD trading.