Future of the dollar index: Overcoming recent collapse? – London Business News | Londonlovesbusiness.com

The US Dollar index recorded highly volatile trading near the 104.30 on Friday, as markets seek direction amidst clear rotations in stock markets.

With the Federal Reserve expected to cut interest rates in September, investors are likely to move away from large tech stocks once monetary easing begins, favouring smaller, specialized stocks poised to benefit from increased disposable income post-rate cuts.

On the economic calendar, markets await June Producer Price Index figures to gauge whether producer and consumer price trends align.

Preliminary July consumer sentiment readings from the University of Michigan are also anticipated. Expectations include a slight increase in the monthly Producer Price Index to 0.1% from -0.2%, a rise in the core monthly Producer Price Index to 0.2% from 0.0%, and a slight uptick in the annual Producer Price Index to 2.3% from 2.2%.

Forecasts also suggest growth in the core annual Consumer Price Index to 2.5% from 2.3%, and an increase in consumer confidence to 68.5 from 68.2. Market expectations for consumer inflation over the next five years remain at 3%.

As a result, stock markets are experiencing hesitation among investors, particularly as a September interest rate cut appears increasingly likely. Major tech stocks are seeing profit-taking, while small and large-cap stocks are witnessing significant inflows. European stocks rose approximately 0.50% today, while US futures recorded a slight decline.

Currently, the probability of a 25-basis-point interest rate cut stands at 86.4%, with temporary rate stability at 7.5%, and the likelihood of a 50-basis-point rate cut at 6.2%. The yield on 10-year US Treasury bonds is trading at 4.22%, rebounding from its lowest level of 2024 following Consumer Price Index data, which added further pressure on dollar trading.

The US Dollar faced significant pressure following the release of Consumer Price Index data, compounded by Japan’s intervention in the foreign exchange market, supporting the Japanese yen. However, this impact quickly dissipated. This suggests to me a reluctance among market participants to see a sharp decline in the US Dollar despite encouraging data.

Today’s Producer Price Index figures are likely to move the market, being a preferred inflation gauge for the Federal Reserve. We believe another decline in the US Dollar is possible given growing market conviction in the Fed’s monetary easing, potentially retesting June’s lows around 104.00 points.

However, I believe this week’s developments highlight that weak data in several major economies could prompt more accommodative central bank policies. This reinforces that current data and relative figures should continue supporting the Dollar over the medium to long term. Today’s data will be crucial in shaping the Federal Reserve’s near-term expectations.