Dollar Outlook: Inflation expectations cool, dollar index retreats from 50-day moving average

On Friday (July 18), the Dollar Index (DXY) fell to 98.33 intraday, down 0.30%, as the Dollar retraced from the key 50-day simple moving average (SMA) near 98.70. Following a steady rebound from the low of 96.377 in July, the Dollar Index was blocked below the 50-day moving average and failed to break above the recent high of 98.950. Traders are currently looking at 97.664 as the next technical support level, which is the 50% Fibonacci level of the short-term retracement.

Is the Fed's tightening narrative losing steam?

Last week's stronger-than-expected US retail sales data and lower initial jobless claims briefly boosted the dollar and dented market expectations of a sharp rate cut by the Federal Reserve. Traders now expect a rate cut of about 45 basis points for the rest of 2025, down slightly from 50 basis points at the start of the week. The change in expectations comes as June inflation data showed the consumer price index (CPI) rising to a five-month high, providing support for the Federal Reserve to delay deeper rate cuts.

However, investor sentiment remained fragile as Mr. Trump's new tax cuts and spending package raised concerns about fiscal sustainability and the president's persistent criticism of Federal Reserve chairperson Jerome Powell for failing to cut interest rates more quickly injected fresh political uncertainty into the market outlook.

The euro and the pound rose but will still record weekly losses

Despite the dollar's weakness on Thursday, the euro and sterling are still likely to end the week lower. The euro rose 0.4% to 1.1643 against the dollar (EUR/USD) in the latest update, while the pound rose 0.26% to 1.3453 against the dollar (GBP/USD). The dollar index, which tracks the greenback against six major currencies, is still up 0.5% this week and has gained 1.4% over the past two weeks. However, the index is still down 9.15% so far this year on the back of a deep sell-off triggered by policy uncertainty in March and April.

Consumer confidence rose slightly, but inflation expectations fell back

The University of Michigan preliminary report in July showed that the consumer confidence index rose to 61.8, the highest in five months, but still down 6.9% year-on-year. Despite improved indicators of current economic conditions, inflation expectations cooled significantly: one-year inflation expectations fell to 4.4% from 5.0%, and long-term inflation expectations fell to 3.6%, the lowest since February. Easing inflation concerns may dampen bets on the Federal Reserve's aggressive rate cuts, but underpin the overall economic stabilization theme.

Market Outlook: Dollar Index Faces Resistance, Support Focuses on 97.66

(Daily chart of the US dollar index, source: Yihuitong)

From a technical point of view, the dollar index is still constrained by the downside 50-day moving average, and several attempts to break through recent highs have failed. Unless the dollar index can clearly close above the late June high of 99.421, the ability to move up will remain limited.

The short-term focus turns to whether the support level of 97.664 can be held. If it falls below this level, it may further lower the low of 96.377 in early July. As the fundamentals are weakening and political risks are rising, the operating space for the dollar bulls is gradually narrowing.

At 00:24 Beijing time, the US dollar index was trading at 98.3912/4108, down 0.24%.