US Dollar Index gains traction above 103.50 as traders await US Retail Sales data

• The US Dollar gathers strength to around 103.60 in Thursday's early European session, up 0.12% on the day.
• The rising bets that the Fed will gradually lower interest rates support the USD. 
• The US Retail Sales data will take center stage on Thursday. 

The US Dollar Index (DXY) extends the rally to multi-week tops near 103.60 during the early European session on Thursday. The rising expectation that the US Federal Reserve (Fed) will proceed with modest interest rate cuts over the next year continues to underpin the Greenback. Traders brace for the US September Retail Sales data, which is due later on Thursday. 

The Fed kicked off its easing cycle with a jumbo move by 50 basis points (bps) at its last policy meeting in September, but market expectations have shifted to a slower pace of Fed rate cuts, boosting the USD broadly. San Francisco Fed President Daly emphasized that "one or two cuts was a reasonable thing" as the US economy is more balanced.  Meanwhile, Atlanta Fed President Bostic stated that he has one more 25 basis points (bps) rate cut pencilled in for this year. 

Minneapolis Fed President Neel Kashkari said earlier this week that future interest rate cuts would be "modest" and noted that policy decisions would depend on economic data. The markets have priced in nearly 92.1% chance of a 25 bps Fed rate reduction in November, according to the CME FedWatch tool. 

The US Retail Sales will be in the spotlight on Thursday, which is expected to rise to 0.3% MoM in September from 0.1% in August. If the data remain strong, there is still scope for these Fed easing expectations to adjust further.

On the other hand, some easing in geopolitical tensions in the Middle East could cap the upside for the Greenback. Israel told the United States that a planned retaliatory attack on Iran won't target nuclear and oil facilities, according to senior Biden administration officials, a promise sought by the White House to head off further Middle East escalation, per the Wall Street Journal.