US Dollar Index (DXY) dives below 97.00 as investors brace for the Fed

The US Dollar dives further and reaches fresh two-month lows below 97.00.
The market is positioning for a series of Fed cuts, and the US Dollar struggles.
Later today, US Retail Sales are expected to show that consumption eased in August.

Guillermo Alcala FXStreet

The US Dollar is extending losses on Tuesday, trading about 1.20% lower from last week’s highs as investors position for a “dovish cut" by the Fed on Wednesday. The Index broke below late July lows at the 97.10 area and is testing levels below 97.00 ahead of the US Retail Sales release.

Later today, August's retail consumption data is expected to show a slowdown to 0.2%, from the 0.5% reading seen in the previous month. Excluding autos, sales of all other products are seen accelerating to 0.4% in August from 0.3% in July.

These figures are not expected to alter the view that the Federal Reserve will cut interest rates by 25 basis points after a two-day meeting starting today, and highly likely hint at further easing down the road.

Futures markets are nearly fully pricing a quarter-point cut on Wednesday and an almost 70% chance of two more rate cuts in the subsequent two meetings before the year-end. All in all, the higher probability that Fed’s Powell will prioritise the labour market before inflation, and accelerate the easing cycle, has boosted risk appetite, sending the US Dollar lower across the board.

Economic Indicator

Retail Sales (MoM)

The Retail Sales data, released by the US Census Bureau on a monthly basis, measures the value in total receipts of retail and food stores in the United States. Monthly percent changes reflect the rate of changes in such sales. A stratified random sampling method is used to select approximately 4,800 retail and food services firms whose sales are then weighted and benchmarked to represent the complete universe of over three million retail and food services firms across the country. The data is adjusted for seasonal variations as well as holiday and trading-day differences, but not for price changes. Retail Sales data is widely followed as an indicator of consumer spending, which is a major driver of the US economy. Generally, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

Retail Sales data published by the US Census Bureau is a leading indicator that gives important information about consumer spending, which has a significant impact on the GDP. Although strong sales figures are likely to boost the USD, external factors, such as weather conditions, could distort the data and paint a misleading picture. In addition to the headline data, changes in the Retail Sales Control Group could trigger a market reaction as it is used to prepare the estimates of Personal Consumption Expenditures for most goods.

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

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The 2% inflation target came from a throwaway remark. It now moves trillions

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