DXY: U.S. Dollar Firms Up as Rate Cut Hopes Evaporate

The U.S. Dollar Index (DXY) firmed up nearly 0.92% this week as the latest inflation print evaporated any hopes for rate cuts in the near term.

Inflation Shock and Receding Rate Cut Hopes

The consumer price index (CPI) surged by 3.5% year-over-year in March. In response, the DXY shot up to 105.25, a level last seen in November 2023. This rise indicates that traders are starting to anticipate higher interest rates for a longer duration this year. The Fed, which relies on data, may opt to wait for more signs that inflation is decreasing before making significant moves. This development also suggests that markets are starting to scale-back their expectations for a rate cut, pushing the timeline from June to September.

The U.S. Dollar is displaying strength against multiple currencies, including the Yen (FX:USD-JPY), the Euro (FX:USD-EUR), and the Pound (FX:USD-GBP). At around 153, the Japanese Yen is now hovering at its lowest in nearly three and a half decades. Meanwhile, the Chinese Yuan (FX:USD-CNY) could remain under pressure, as inflation in the country rose by a tepid 0.1% in March.

Shifting Narrative

The inflation shock in the U.S. could also lead to a slower pace of rate cuts by the European Central Bank (ECB) and the Bank of England. The shift in the global rate cut narrative is a rapid change from only a few weeks ago when markets largely expected a series of rate cuts in major markets globally in H2 2024. Now, those bets are being reset.

Is the Dollar Expected to Rise?

For the DXY, these dynamics could mean more strength and the greenback possibly reigning supreme in the short term.

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