The US dollar lost momentum after cooler inflation data raised fresh hopes for interest rate cuts from the Federal Reserve. While this boosted market confidence in the short term, it also added to the uncertainty surrounding the dollar’s next move. With trade issues still unresolved and economic signals mixed, much now depends on whether upcoming data can support a more stable recovery.
The US dollar weakened significantly on Tuesday and stabilised slightly by Wednesday morning after April’s inflation data came in lower than expected, reinforcing market speculation about potential Federal Reserve rate cuts later this year.
The US Dollar Index (USDX) dropped to 100.716, retreating from Monday’s one-month high of 101.791, marking its worst single-day drop since mid-April.
The decline followed a report from the US Labour Department, showing that consumer prices rose by just 0.2% month-on-month in April, missing the 0.3% consensus forecast from Reuters.
This softer inflation print added weight to dovish sentiment, especially after March’s rare 0.1% monthly decline.
However, renewed inflation risks could emerge, particularly as trade tensions and tariffs remain unresolved.
While a temporary 90-day tariff truce has been reached with China, upcoming trade talks carry uncertainty.
Meanwhile, President Trump has hinted at potential trade agreements with India, Japan and South Korea, though the lack of structured deals continues to stir caution among investors.
Despite Tuesday’s decline, analysts at TD Securities and the Commonwealth Bank of Australia believe the dollar may still see short-term strength before entering a broader downtrend.
TD forecasts a possible 5% depreciation in H2 2025, as global investors seek to diversify away from US assets due to persistent policy uncertainty.
The USDX briefly surged past 101.70 on 13 May, peaking at 101.79, but failed to sustain momentum.
A subsequent downturn saw the index slip below its 10-, 20- and 30-period moving averages, confirming a bearish crossover and ongoing downtrend through 14 May.
The index now trades around 100.71, aligning closely with the previous support level of 100.45.
Momentum indicators reinforce the bearish view. The MACD histogram remains in negative territory, and the signal lines show a widening bearish divergence, suggesting continued selling pressure.
Unless buyers can push the price back above 101.00, the dollar remains vulnerable, with support levels at 100.45 and potentially 100.20 now in focus.
The dollar may enjoy a short-lived rebound as traders absorb the latest CPI figures and monitor shifts in global sentiment.
However, the broader outlook remains uncertain, with Fed funds futures pricing in at least 50 basis points of rate cuts before year-end.
This suggests markets are firmly leaning towards a more accommodative Fed stance.
For the greenback to mount a more sustained recovery, incoming US data will need to surprise to the upside—particularly in areas like employment, retail sales and industrial output.
Clearer direction on trade negotiations, especially with major partners such as China and Japan, would also help restore confidence.
Until then, the dollar’s upside is likely to be capped, with risks tilted to the downside if economic softness continues.
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