The US dollar has fallen as inflation slows down, what's next for the forex market ?
On Wednesday, the US dollar index settled below 101.00, achieving new losses after falling by about 1% in the previous session, following weak US inflation data that showed an unexpected slowdown, raising questions about the impact of President Trump's trade policies and the ability of the US economy to maintain its momentum.
Inflation data surprises the markets
Data from the US Bureau of Labor Statistics on Tuesday revealed that the annual inflation rate fell to 2.3% in April, the lowest since February 2021, and below analysts forecasts of 2.4%.
This decline came to reinforce doubts about the sustainability of inflationary pressures, especially in light of the recent tariff measures between the United States and China.
Trade and monetary policy in the focus of attention
Markets continue to assess the effects of the joint decision between Washington and Beijing to suspend mutual tariffs for 90 days, while reducing duties on some goods to 10% and 30%. This development eased trade tensions, but also reduced market expectations for a quick cut in interest rates by the Federal Reserve, as it is believed that the central bank may be content to wait if inflation indicators continue to decline.
What is controversial, however, is President Trump's repeated statements on his truth social platform, where he attacked Federal Reserve Chairman Jerome Powell accusing him of being late in cutting interest rates compared to other global central banks.
These statements add political pressure on the policy of the independent central bank.
Market forecast:where is the dollar going ?
The markets are still at the stage of absorbing the fallout from the recent data, which sent conflicting signals:
- Weak inflation indicates a slowdown in growth, which may push the Fed towards a more flexible policy.
- The trade truce may support investor confidence, but it reduces the need for the central bank to stimulate the economy by cutting interest rates.
On the other hand, the economic data expected on Thursday, especially producer price inflation and retail sales, will reveal the strength of consumer spending, which is the mainstay of the US economy, as well as price trends at the producer level, which may predict the path of inflation in the coming months.
Downside scenario:
if tomorrow's data show continued weak inflation and spending, the dollar may come under further pressure, strengthening the likelihood of a rate cut later in 2024.
Bullish scenario:
the dollar may find support if the markets are surprised by positive data, postponing expectations of monetary easing.
