DXY Weakens as Cooling Inflation Eases Fed Rate Hike Odds

The US Dollar Index (DXY) is weakening for the second consecutive day, trading around 99.90 in Asian hours on Friday. The decline comes as investors digest a softer-than-expected US inflation report that has weighed on sentiment.

The Bureau of Labor Statistics reported that wholesale costs for goods and services were flat in July, below the anticipated 0.2% growth. Excluding volatile food and energy components, the core Producer Price Index (PPI) rose 0.2%, slightly under market consensus expectations of 0.3%. On an annual basis, headline PPI climbed 4.7% year-over-year in July, while core PPI increased by 4.2% over the same period.

Rabobank's Jane Foley observes that 'Fed rate hike speculation has recently suffered a setback on the back of recent US data releases,' shifting expectations regarding Federal Reserve monetary policy. According to the CME FedWatch Tool, markets are now pricing in a 34.8% probability of a US rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.

Foley cautions that this emerging downside for the Dollar is not assured, stressing that the outlook 'could still be thrown off course if oil prices spike higher again,' with renewed energy market tensions potentially restoring support for the US currency.