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Dollar index faces critical support risk as September hike odds fall

Fed funds futures now imply about a two-in-three chance the Fed holds 3.50% to 3.75% on Sept. 16, driven by cooler CPI and softer producer prices.

Reported · Written up by our desk · Major Pairs

Markets are scaling back expectations for a Federal Reserve rate hike in September, leaving the US dollar looking increasingly fragile as the Dollar Index nears a critical support level, according to Action Forex. The outlet notes that interest-rate differentials are a key driver for global capital flows, so fading odds for higher US rates can reduce demand for the currency.

Action Forex says Fed funds futures now imply roughly a two-in-three chance the Fed holds rates in a 3.50% to 3.75% range on Sept. 16, after pricing suggested a hike two weeks earlier. The odds shift is tied to the view that any further tightening is more limited and delayed than part of a sustained sequence of increases.

The source attributes the faster-than-expected downgrade in hike odds primarily to inflation data. It points to July CPI rising 0.1% month over month, cooling the annual rate to 3.4%, and to core inflation slowing to 2.5% from its prior pace, which it frames as a sign that an earlier, oil-driven inflation shock is being absorbed.

Action Forex also cites July producer inflation as reinforcing the wait-and-see case, with US PPI unchanged and annual producer inflation slowing to 4.7%. It adds a nuance that PPI excluding food, energy, and trade services accelerated to 0.4% month over month, partly reflecting stronger financial-services prices, which could matter for inflation measures the Fed watches later this month.

Latest closeDollar index 99.64 ▼0.3%

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