US Dollar Index Slips Below 107.00 Ahead of Fed Rate Decision

The US Dollar Index (DXY) edges lower, trading near 106.85 during early European hours on Wednesday. Traders remain cautious as they await the Federal Reserve’s (Fed) policy decision, with speculation mounting that the central bank will adopt a more cautious tone on further rate cuts. This outlook helps underpin US Treasury bond yields and offers some support to the US Dollar (USD).

Key US Economic Data

• Retail Sales Outperform Expectations
  The US Census Bureau reported a 0.7% month-on-month increase in Retail Sales for November, surpassing the forecasted 0.5%. This marks a solid improvement from October’s revised figure of 0.5%.
• Industrial Production Declines
  US Industrial Production fell by 0.1% in November, a smaller decline compared to October’s revised drop of 0.4%. Despite these mixed signals, the robust Retail Sales data has not significantly shifted expectations about the Fed’s rate decision.

Federal Reserve Policy Expectations

The Fed is widely anticipated to cut interest rates for the third consecutive meeting, lowering the Federal Funds Rate to a range of 4.25%-4.50%. According to the CME FedWatch Tool, there is a 97.1% probability of a 25 basis points (bps) rate cut, with only a slim 4.6% chance of rates remaining unchanged.

Jacob Channel, senior economist at LendingTree, expects the Fed to implement a 25 bps cut but notes that further reductions may not be imminent. Investors will closely monitor Fed Chair Jerome Powell’s press conference and the updated Summary of Economic Projections (dot plot) for indications of future monetary policy.

Potential Market Impact

• Hawkish Fed Commentary
  If the Fed delivers less dovish remarks or signals a pause in its rate-cutting cycle, the USD could regain momentum against its rivals.
• Dovish Rate Outlook
  Conversely, any indication of additional rate cuts in the near term may exert further pressure on the Greenback.

Outlook

As the Fed decision looms, the DXY remains in a tight range below 107.00. The central bank’s policy stance, combined with Powell’s commentary and the dot plot, will be key in determining the US Dollar’s near-term trajectory. While solid US Retail Sales data supports the case for economic resilience, weaker industrial output and the broader rate-cut narrative keep traders cautious.