US Dollar weakens as CPI reinforces hopes for Fed rate cuts – UBS

The US dollar (USD) came under further pressure after the consumer price index for June showed underlying inflation rising at its slowest pace in three years. The Dollar Index (DXY), which tracks the Greenback against six major currencies, fell as much as 0.9% on Thursday right after the data release, though it rebounded slightly during Asia morning trade on Friday, UBS FX analysts note.

USD to trend lower to 103–104 in the coming days

“With headline CPI registering the first monthly decline (–0.1%) since December 2022, and the core measure advancing by the smallest in three years (+0.1%), the report added to confidence that a pivot from the Federal Reserve is getting closer. It is also the latest in a series of soft data that have weighed on the US dollar in recent weeks. Since late June, the DXY index has fallen 1.4%.

“The door now appears wide open for the Federal Reserve (Fed) to begin cutting interest rates, in our view. We expect Fed to use the FOMC meeting at the end of the month to signal that it is prepared to cut at the September meeting as long as the data continues on its recent trend. This means that the USD should continue to trend lower to 103–104 in the coming days.”

“We continue to advocate selling USD upside for a yield pickup in the coming months, as market expectations of a deeper Fed rate-cutting cycle and fears about the size of the US fiscal deficit are headwinds for the greenback in the near future and over the long term.”