The US Dollar Index (DXY) softens further, trading around 97.40 in Tuesday’s early Asian session, following a weaker-than-expected US jobs report that has increased expectations for Federal Reserve (Fed) rate cuts.
Fed Rate Cut Expectations Grow After Weak NFP Report
The US dollar is under pressure after the release of the August Nonfarm Payrolls (NFP) report, which showed a significant slowdown in job growth. The NFP data revealed that the US economy added only 22,000 jobs, far below the anticipated 75,000, while the unemployment rate rose to 4.3%, its highest level since 2021. This disappointing report has heightened expectations that the Fed will cut interest rates in response to a weakening labor market.
Currently, market participants are pricing in a near 90% chance of a 25-basis point rate cut by the Fed at its upcoming policy meeting. There’s even a 10% probability of a more aggressive 50-basis point cut, according to CME Group’s FedWatch tool.
The Spotlight Shifts to US PPI Data
Looking ahead, traders are awaiting the release of the US Producer Price Index (PPI) for August, due on Wednesday. The headline PPI is expected to show a 3.3% year-over-year increase, while the core PPI (excluding food and energy) is forecast to rise 3.5%. A stronger-than-expected PPI report could provide a temporary lift to the dollar, especially if inflationary pressures continue to rise, prompting the Fed to slow its rate-cut path.
Impact of Inflation Data on the US Dollar
If inflation data continues to show signs of price pressures, it could fuel a surprise uptick in the US Dollar. According to Juan Perez, director of trading at Monex USA, “There’s a chance for a surprise uptick in the dollar if the inflationary figures, such as PPI and CPI, show prices spiraling out of control.”
For now, the US Dollar remains vulnerable to further losses as market participants continue to price in a dovish Fed outlook, awaiting key inflation data that could ultimately shape the future direction of the US economy.
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