Higher energy costs and Gulf tensions support the USD despite softer US CPI and PPI data trimming Fed rate cut expectations.
The US Dollar Index (DXY) remains near 100.50, supported by rising energy prices and geopolitical tensions in the Gulf, despite softer US inflation data. Last week’s weaker-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) have reduced expectations for Federal Reserve tightening, though markets still price only 40 basis points of easing over the next nine months.
The DXY is about 1% below its June peak, as limited Fed easing contrasts with 55-60 basis points of tightening priced for the eurozone and UK. However, elevated energy prices keep the Fed cautious, reinforcing the dollar’s resilience. Analysts expect USD/JPY to push higher, potentially breaking above 160, as Japanese authorities refrain from intervention during a public holiday.
Investors holding long dollar positions appear unlikely to sell in the current environment, with energy shocks underpinning the currency’s strength.