US Dollar Outlook: DXY Slips Below 99 as Soft CPI Fuels Fed Rate Cut Speculation

The US Dollar Index (DXY) extended its losses on Wednesday, falling 0.47% to 98.583, as weaker-than-expected May inflation data reinforced expectations of an imminent Federal Reserve interest rate cut.

🔻 Inflation Miss Raises Fed Cut Bets

May’s Core CPI rose just 0.1% month-over-month, significantly below the 0.3% forecast and cooling from April’s 0.2% gain. On a yearly basis, Core CPI increased by 2.8%, under the expected 2.9%. Headline CPI held steady at 2.4%.

Following the data release, market participants sharply revised their rate cut expectations. Fed futures now price in a 68% chance of a rate cut by September, up from 57% before the CPI report. This sent Treasury yields tumbling, with the 10-year yield dropping to 4.12% and the 2-year yield falling to 3.95%, widening the yield curve inversion and highlighting dovish monetary expectations.

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🧾 Trump’s China Deal Offers Temporary Relief, But Tariff Concerns Remain

The dollar briefly found support after President Trump declared a new trade framework with China, covering agreements on Chinese student access to U.S. universities and rare earth exports. However, skepticism surrounds the deal’s details, especially as the tariff framework remains aggressive, including:

• 10% base U.S. tariffs
• An additional 20% on fentanyl-linked goods
• 25% continuation of previous tariffs

China, in response, will impose a 10% tariff on select U.S. goods. Market observers noted the constructive tone but questioned implementation. “The agreement is in place. The real challenge is enforcement,” said John Praveen of Paleo Leon.

Despite uncertainties, FX markets reacted positively:

• EUR/USD rose 0.3% to 1.1461
• USD/CHF declined 0.3% to 0.8203

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📉 DXY Technical Analysis: Bearish Momentum Below 50-Day MA

Technically, DXY remains under pressure below the declining 50-day moving average of 100.100. The index is now targeting key support in the 97.921–97.685 zone. Without a recovery above the 100.100 resistance, the bias remains to the downside.

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💰 Treasury Auctions Reflect Strong Demand as Inflation Cools

Beyond CPI, bond markets showed notable demand. A $39 billion 10-year Treasury auction drew strong interest, particularly from indirect bidders. Analysts from BMO labeled it a “robust auction,” suggesting investor confidence in U.S. fiscal outlook amid geopolitical and inflation uncertainty.

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📊 Forecast: DXY Faces Downside Risks if Dovish Fed Narrative Grows

With inflation cooling, rate cut bets intensifying, and trade headwinds persisting, DXY could retest its long-term support near 97.70. A decisive break below this area may open room for a deeper decline unless the Fed pivots hawkishly or a new geopolitical trigger boosts safe-haven demand for the dollar.

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