The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against a basket of six major currencies, extended its upside momentum for a third consecutive session, trading near 98.60 during European hours on Friday. Market participants are now turning their attention to the University of Michigan Consumer Sentiment Index for December, due later in the session, for further clues on the US economic outlook.
However, the dollar’s upside potential may remain capped as expectations grow that the US Federal Reserve (Fed) could begin easing policy sooner than previously anticipated, following a softer-than-expected US Consumer Price Index (CPI) report for November.
According to the CME FedWatch Tool, the probability of interest rates remaining unchanged at the Fed’s January meeting stands at 73.3%, down from 75.6% a day earlier, while the likelihood of a 25-basis-point rate cut has increased to 26.6% from 24.4%.
Data released by the US Bureau of Labor Statistics (BLS) on Thursday showed that headline CPI inflation slowed to 2.7% year-on-year in November, undershooting market expectations of 3.1%. Meanwhile, core CPI, which excludes food and energy prices, rose by 2.6%, below the forecast of 3.0% and marking its slowest pace since 2021.
Adding a political dimension to the outlook, US President Donald Trump stated on Thursday that the next Federal Reserve chair will be someone who strongly supports significantly lower interest rates. Trump also indicated that he plans to announce a successor to current Fed Chair Jerome Powell in the near future, a development that could further influence market expectations around future US monetary policy.
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