The US Dollar (USD) experienced a sharp decline on Wednesday following the release of cooler-than-expected US Consumer Price Index (CPI) data. The headline inflation rate fell to 0.0% in May, below forecasts of 0.1%, while core inflation also came in softer than anticipated.

Market Focus Shifts to Fed Decision and Dot Plot

With the CPI report confirming disinflationary trends, market attention is now laser-focused on the Federal Reserve’s (Fed) upcoming interest rate decision and the highly anticipated “dot plot” update. The dot plot will reveal policymakers’ projections for the future path of interest rates, and investors are keen to see if the softer inflation data will lead to a more dovish outlook.

CPI Data Sends Markets Soaring

The unexpectedly low inflation figures triggered a surge in risk appetite, sending equity markets soaring. European and US indices are both trading in the green, as investors increasingly bet on the possibility of a Fed rate cut in 2024. The probability of a rate cut in September now stands at 48.3%, according to the CME FedWatch tool.

Technical Analysis: USD’s Fate Hangs in the Balance

The US Dollar Index (DXY) faces a critical juncture, with potential for both further gains and a complete reversal of weekly gains, depending on the Fed’s policy announcement and subsequent commentary from Chairman Jerome Powell.

On the upside, resistance levels to watch include 105.52, 105.88, and the year-to-date high of 106.51. To the downside, the 55-day, 100-day, and 200-day SMAs clustered around 105.07 and 104.48 are providing strong support. A break below these levels could trigger further losses towards 104.00.

Key Takeaways:

• The softer-than-expected US CPI report has significantly increased expectations for a Fed rate cut in September.
• Market participants eagerly await the Fed’s decision and dot plot update for clues on the future direction of monetary policy.
• The US Dollar is at a crossroads, with its fate largely dependent on the Fed’s messaging and actions.