The US Dollar (USD) experienced significant weakness as traders sharply reduced expectations for near-term Federal Reserve (Fed) interest rate hikes following softer-than-expected US inflation data. The US Producer Price Index (PPI) for June contracted against expectations, confirming deflationary trends already highlighted by the Consumer Price Index (CPI) data released the previous day [1][2]. As a result, the probability of a Fed rate hike at the upcoming meeting dropped to 10.2%, down from 31% a week earlier, according to the CME FedWatch tool [2].
This shift in monetary policy expectations led to a notable decline in the US Dollar Index (DXY), which held near 100.48, maintaining Wednesday's losses [2]. The DXY traded below its 20-day Exponential Moving Average (EMA) at 100.78, indicating a near-term bearish bias, with the Relative Strength Index (RSI) at 46.37 suggesting fading bullish momentum [2]. The US Dollar was the weakest against the New Zealand Dollar this week, falling 1.61%, and also lost ground to the Euro, down 0.59% [2].
In the currency markets, the Euro (EUR) benefited from the USD's decline, with the EUR/USD pair rising to the upper range of the 1.1400s and testing the monthly channel top near 1.1485 [1]. The pair traded at 1.1469, up about 0.85% over the last three days, supported by constructive technical momentum as indicated by a four-hour RSI around 63 and a positive MACD [1]. Despite disappointing European Industrial Production data for June, calls for monetary tightening from European Central Bank (ECB) policymakers helped maintain the Euro's strength [1].
Looking ahead, investors are awaiting US Retail Sales data for June and speeches from Fed officials for further guidance on monetary policy amid signs of slowing inflation [2]. On the technical front, a sustained move above 1.1485 in EUR/USD could target the June 16 and 17 highs near 1.1620, while immediate support lies at the July 14 low of 1.1378 [1]. For the DXY, initial resistance is at the 20-day EMA (100.78), with support at the psychological 100.00 level and further at 99.19 [2].
Geopolitical factors, such as elevated energy prices due to renewed Middle East hostilities, could potentially limit further downside in the US Dollar, though this was noted as a possibility rather than a current market driver [2].
CONCLUSION
Softer US inflation data has led to a sharp repricing of Fed rate hike expectations, resulting in a broad decline in the US Dollar and a rally in EUR/USD to monthly highs. Market participants are now focused on upcoming US economic data and Fed communications for further direction. The near-term outlook remains bearish for the USD, with technical and fundamental factors favoring continued Euro strength.