The US Dollar Index (DXY) surged to multi-week highs near 103.60 during the early European session on Thursday, driven by rising expectations that the Federal Reserve (Fed) will implement modest interest rate cuts in the coming year. Traders are also gearing up for the release of US Retail Sales data for September, which is set to be announced later today.
Following a significant 50 basis point rate cut at its September policy meeting, the Fed has shifted its stance toward a more gradual pace of easing, leading to a broad appreciation of the USD. San Francisco Fed President Mary Daly indicated that “one or two cuts was a reasonable thing,” noting that the US economy appears more balanced. In contrast, Atlanta Fed President Raphael Bostic mentioned that he anticipates one additional 25 basis point cut this year.
Minneapolis Fed President Neel Kashkari echoed this sentiment earlier this week, stating that any future rate cuts would be “modest” and contingent on economic data. According to the CME FedWatch tool, markets have priced in a nearly 92.1% probability of a 25 basis point rate reduction in November.
The upcoming Retail Sales report is a key focus for market participants, with expectations of a rise to 0.3% month-over-month in September, up from 0.1% in August. Strong data could lead to further adjustments in the Fed’s easing expectations.
On the geopolitical front, a recent easing of tensions in the Middle East may temper the dollar’s gains. Israel has informed the United States that a planned retaliatory attack on Iran will not target nuclear or oil facilities, a commitment made to prevent further escalation in the region, as reported by senior officials in the Biden administration and confirmed by the Wall Street Journal.
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