US Dollar Forecast: DXY Falls as Soft CPI Data Fuels Fed Rate Cut Expectations

Dollar Drops Below 99 as Soft CPI Fuels Fed Cut Bets, China Deal Adds Pressure

The U.S. Dollar Index (DXY) dropped 0.47% on Wednesday to 98.583, as cooler-than-expected inflation data revived expectations for a Federal Reserve rate cut. The core Consumer Price Index (CPI) rose just 0.1% in May, below the 0.3% forecast and slower than April’s 0.2% increase. On a year-over-year basis, core CPI rose 2.8%, easing from 2.9% projections. Headline inflation remained steady at 2.4%.

This inflation surprise sparked a sharp move in rate expectations. Traders in interest rate futures now assign a 68% probability the Fed cuts rates by September, up from 57% before the data. Treasury yields dropped across the curve, with the 10-year yield down six basis points to 4.12% and the 2-year yield slipping to 3.947%, deepening the inversion and reinforcing a dovish outlook.

China Trade Framework Offers Market Relief, But Key Questions Linger

The dollar briefly trimmed losses after President Trump announced a “done deal” with China, which includes U.S. universities welcoming Chinese students and Beijing approving rare earth exports. However, the tariff framework remains aggressive. A White House official said U.S. tariffs will include a 10% baseline, an added 20% for fentanyl trafficking, and 25% on pre-existing levies—while China will impose a 10% tariff on U.S. goods.

Though traders welcomed the de-escalation tone, skepticism remains on enforceability. “They got an agreement. The question is whether it will be implemented,” said John Praveen of Paleo Leon. Relief, however, was evident across FX markets, with EUR/USD climbing 0.3% to 1.1461, and USD/CHF down 0.3% at 0.8203.

Technical Picture Turns Bearish Below Key Moving Average

Technically, DXY is vulnerable below its downtrending 50-day moving average at 100.100. Momentum and trend both point lower, with multi-month support eyed between 97.921 and 97.685. Unless bulls reclaim 100.100, risk remains skewed to the downside.

Treasury Auction Signals Strong Demand as Inflation Cools

Bond market reaction extended beyond inflation. A $39 billion 10-year Treasury auction was described as “strong” by BMO, with healthy participation from indirect bidders. Traders interpreted this as a market vote of confidence in fiscal management despite trade uncertainty.

Forecast: DXY Likely to Test Long-Term Support if Fed Bets Intensify

With inflation cooling and China trade risks reduced, Fed policy expectations are once again front and center. If economic data continues to show subdued price pressures and Treasury demand remains firm, DXY could extend lower toward the 97.70s. A break below this zone may open the door to additional downside, barring a hawkish shift from the Fed or renewed geopolitical stress.

More Information in our Economic Calendar.