US Dollar declines as markets digest inflation data, rising dovish Fed bets

• US Dollar depreciates as investors digest inflation data.
• Fed rate cut expectations rise following dovish comments.
• On the data front, Consumer Confidence improves slightly in early September.

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, is posting losses on Friday as markets continue digesting this week's inflation data. At the end of the week, there was a slight increase in expectations that the Federal Reserve may cut interest rates by 50 bps in the next week's meeting.

The US economy remains robust, with growth exceeding expectations. However, financial markets may be overestimating the likelihood of aggressive monetary policy easing. This is evident in the elevated valuations of certain assets. Investors should exercise caution and consider that the economic outlook may not warrant the current pricing practices.

Daily digest market movers: US Dollar Index declines as Fed decision looms

• "Fed whisperer" Nick Timiraos suggested that the decision could be a "close call," raising the odds of a 50-basis-point cut from 10% to nearly 50%.
• The market now prices in nearly 125 basis points of easing by year-end and 250 basis points over the next 12 months.
• On Thursday, August Producer Price Index (PPI) data was in line with expectations, with headline inflation at 1.7% YoY and core inflation at 2.4% YoY.
• On Friday, Consumer Confidence improved slightly in early September, with the University of Michigan's Consumer Sentiment Index rising to 69 from 67.9 in August.
• The details of the survey showed that one-year inflation expectations declined to 2.7% from 2.8%, while five-year inflation expectations rose to 3.1% from 3%.

DXY technical outlook: Bearish momentum resumes

Technical indicators for the DXY index have resumed their downward trajectory, falling into negative territory. Notably, the index has breached below its 20-day Simple Moving Average (SMA), indicating a shift in momentum toward the downside.

The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) also confirm the bearish bias. In light of these developments, further declines in the DXY index are anticipated in the near future.

Key support levels to watch include 101.60, 101.30 and 101.00, while potential resistance levels lie at 101.80, 102.00 and 102.30.