US Dollar Index seems vulnerable near 105.00 on firm Fed rate cut bets for September

• The USD Index struggles to sustain above 105.00 amid signs that the US labor market cools down.
• Firm speculation for Fed rate cuts in September keeps the US Dollar on its toes.
• Investors shift focus to the US inflation data for fresh guidance.

The US Dollar Index (DXY) trades close to the crucial support of 105.00 in Friday’s European session. The USD Index struggles to hold the above-mentioned support as conviction among investors over the Federal Reserve (Fed) starting to reduce interest rates from the September meeting has strengthened. This has also improved the risk appetite of investors. S&P 500 futures have posted significant gains, exhibiting strong demand for risk-sensitive assets.

Cooling US labor market conditions boost Fed rate cut bets

The expectations for the Fed to begin reducing interest rates from the September meeting have escalated as a recent set of job data has indicated that labor market conditions are steadily cooling.

The United States Department of Labor reported on Thursday that individuals claiming jobless benefits for the first time were highest in the last eight months. For the week ending May 3, Initial Jobless Claims (IJC) were 231K, significantly higher than the consensus of 210K and the prior reading of 209K, upwardly revised from 208K. In addition to rising jobless claims, US employers added fewer jobs in April. Fresh Nonfarm Payrolls (NFP) were 175K, the lowest in six months.

Focus shifts to US Inflation

This week, investors relied on commentary from Fed policymakers to project US Dollar’s moves due to absence of top-tier economic data. Next week, US economic calendar will be data-packed as the Producer Price Index (PPI) and Consumer Price Index (CPI), and the Retail Sales data are lined-up for release. The major event will be the consumer price inflation data, which will influence market expectations for Fed rate cuts.

US Dollar technical analysis

The USD Index trades in a Rising Channel chart pattern on a daily timeframe in which each corrective move is considered as buying opportunity by the market participants. The near-term outlook of the USD Index is uncertain as the asset fails to sustain above the 20-day Exponential Moving Average (EMA), which trades around 105.40.

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00, suggesting indecisiveness among market participants.

USD Index daily chart