US dollar falls further as Fed may announce bigger cut next week

The US dollar falls as investors analyze inflation data.
Expectations for Fed rate cut rise after dovish comments
In terms of data, there was a slight improvement in consumer confidence in early September.

The U.S. Dollar Index (DXY), which measures the value of the dollar against a basket of currencies, is down Friday as markets continue to digest this week’s inflation data. The week ended with a slight escalate in expectations that the Federal Reserve could cut interest rates by 50 basis points at its meeting next week.

The US economy remains forceful, with growth exceeding expectations. However, financial markets may be overestimating the likelihood of aggressive monetary easing. This is evident in elevated valuations of some assets. Investors should remain cautious and consider that the economic outlook may not justify current pricing practices.

Daily Market Factors Review: US Dollar Index Falls on Fed’s Approach

Federal Reserve Whisperer Nick Timiraos suggested the decision could be “difficult to make,” raising the possibility of a 50 basis point rate cut from 10% to almost 50%.
The market is currently pricing in close to 125 basis points of monetary policy easing by the end of the year and 250 basis points over the next 12 months.
On Thursday, producer price index (PPI) data for August were in line with expectations: overall inflation was 1.7% y/y, and core inflation was 2.4% y/y.
Consumer confidence improved slightly in early September on Friday, with the University of Michigan’s consumer sentiment index rising to 69 from 67.9 in August.
The survey details showed that one-year inflation expectations fell from 2.8% to 2.7%, while five-year inflation expectations rose from 3% to 3.1%.

DXY Technical Outlook: Downside Momentum Returns

Technical indicators of the DXY index resumed the downward trajectory, falling into negative territory. Significantly, the index broke below its 20-day basic moving average (SMA), indicating a change in momentum to the downside.

The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) also confirm the bearish bias. In lithe of these developments, further declines in the DXY index are expected in the near future.

Key support levels are 101.60, 101.30 and 101.00, while potential resistance levels lie at 101.80, 102.00 and 102.30.