The US Dollar is treading cautiously this week, with traders eyeing Thursday’s release of the Consumer Price Index (CPI) for August — a report that could define the Federal Reserve’s policy stance for the remainder of 2025.
The Dollar Index (DXY) slipped marginally on Wednesday, reflecting a market in wait-and-see mode. Despite a softer-than-expected Producer Price Index (PPI) showing a 0.1% decline month-over-month, the Greenback’s loss was limited to 0.1%.
Inflation: Sticky and Sector-Driven
Consensus among major banks points to a 0.3% monthly rise in both headline and core CPI. This would push annual inflation up to 2.9% from July’s 2.7%, while core CPI is expected to hold steady at 3.1%, according to Bank of America.
Goldman Sachs anticipates a slightly higher core CPI print at 3.13% year-over-year, citing persistent price pressures in autos, travel, and tariff-impacted goods such as electronics and furniture.
Frank Lee of Morningstar characterizes the current inflationary trend as a “slow burn,” driven by gradual cost increases and lingering supply chain disruptions.
Fed Faces a Dual Mandate Crossroad
The Federal Reserve finds itself at a crossroads. On one hand, the labor market has softened, with job creation over the past 12 months revised downward by 911,000 positions and the unemployment rate ticking up to 4.3%, its highest level since 2021.
On the other hand, inflation remains stubbornly above the Fed’s 2% target. ING’s James Knightley warns of the combined drag from inflation, slowing income, and declining consumer sentiment.
The CME FedWatch Tool currently prices in a 90% chance of a 25bp rate cut at the Fed’s September 16-17 meeting, with a 10% probability of a more aggressive 50bp move. But Thursday’s CPI data could sway those expectations significantly.
DXY Technical Picture: Consolidation Within a Bearish Channel
Technically, the US Dollar Index is hovering above key support at 97.60. The index remains locked in a descending channel, with near-term boundaries at 97.25 and 98.55. A breakout from this range is required to shift the narrative.
Bottom Line
All eyes are on Thursday’s CPI report. With inflation data acting as the final input ahead of the Fed’s September meeting, markets could see heightened volatility. The Dollar remains fragile, caught between a weakening job market and unrelenting price pressures.
