US Dollar Index (DXY) at Risk of Freefall. Key Confluence Level In Play

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The dollar dropped for the second day in a row on Wednesday. This came after U.S. inflation data raised hopes for a Federal Reserve rate cut next month, and President Donald Trump's push for lower rates added more pressure on the dollar.

As a result the DXY is now trading at its lowest level since July 28, extending losses of 0.5% recorded after the US CPI report. At some point today markets had pricing at around 100% for a 25 bps rate cut at the September meeting, at the time of writing this is hovering around the 9-% mark.

Source: LSEG

Companies Bearing Costs of Tariffs…For Now

Following the inflation report yesterday, one thing has become clear. Sectors most affected by tariffs didn’t show major issues. Core goods, excluding autos, increased by 0.2% in July after a bigger 0.55% rise in June. This suggests that, for now, companies are mostly handling the extra tariff costs.

This was confirmed by US Treasury Secretary Scott Bessent today. In Bessent 's own words ‘Chinese exporters are likely to accept lower prices as US importers negotiate over who pays the tariffs. I also think that there are probably a lot of corporate margins that got very fat during Covid, and now we're seeing a return to a normal pre-Covid margin.’

The ISM price data shows there could still be some inflation risk from tariffs. However, yesterday's NFIB survey reveals that small businesses are finding it hard to pass these costs to customers, with fewer firms planning to raise prices in the next three months (down from 32% to 28%). While tariffs may eventually cause prices to rise, at this stage it does not appear like it will lead to long-term inflation pressures.

The concerns around tariffs were largely keeping rate cut expectations in check. Now we are seeing aggressive changes with rate cuts being priced in by market participants which is supporting a weaker US Dollar.

US PPI Data to Further Cement Rate Cut Expectations?

On Thursday, US core PPI inflation is expected to return to 3%, while core CPI inflation was confirmed at 3.1% earlier this week. These inflation rates are likely to increase in the coming months and could easily reach 4%.

Despite the outlook for CORE PPI data, this is unlikely to lead to significant changes on the rate cut expectations front. Markets appear to be more concerned with the state of the US jobs market than inflation at this stage. That is not to say that inflation is not a concern, but as mentioned above any uptick in inflation may likely prove short-lived.

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For now though, with rate cuts being touted by the Trump administration and the political narrative for such a move growing, the US Dollar outlook does not look positive. Markets are already concerned about the Fed independence, coupled with the significant job data downgrades, integrity of the data moving forward will also play a role.

Technical Analysis - US Dollar Index (DXY)

The US Dollar index however, is showing some mixed signals of late despite growing signs that fundamental factors are likely to remain bearish moving forward.

As things stand, the bullish move which began from July 1 low at 96.37 remains intact.

The DXY is currently testing a trendline which began from the July 1 low lows, with a higher low printed on July 24 now holding the key.

I have drawn in an ascending trendline which is currently being tested with a break below this and a daily candle close below the higher low at 97.10 likely leading to further declines for the DXY.

If the trendline holds then the longer term descending trendline may come back into play before the previous swing high at 100.25 comes back into focus.

Either way, this current test of the trendline and the higher low from July 24 could be a make or break moment for the US Dollar in the short to medium-term.

US Dollar Index (DXY) Daily Chart, August 13, 2025

Source:TradingView.com

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