US Dollar Forecast: EUR/USD Falls as German Inflation Drops to 2021 Low

Fed Policy Outlook: Powell Indicates Measured Approach

The U.S. Dollar Index (DXY) rose on Tuesday following Federal Reserve Chair Jerome Powell’s comments suggesting a restrained approach to rate cuts. After reaching a year-low of 100.157 last week, the DXY climbed to 101.11—a one-week high. Powell’s hawkish tone implies the Fed will favor smaller quarter-point rate reductions, tempering market expectations of larger cuts. Traders are reducing bets on a larger cut in November, with CME Group’s FedWatch Tool showing a decrease in expectations for a 50 bps cut from 53.3% to 35.4%.

Economic Indicators: Crucial Data Upcoming

At a conference in Tennessee, Powell emphasized that the Fed is not hurrying to cut rates aggressively, indicating that the recent half-point rate reduction was exceptional. With important U.S. economic data set for release, traders are closely monitoring potential signs of further dollar strength. Should these reports surpass expectations, the dollar might extend its upward movement before encountering possible resistance.

JPY Movement: New Leadership’s Influence

The Japanese yen held steady around 143.57 per dollar, following a volatile period triggered by Shigeru Ishiba’s appointment as Japan’s new prime minister. Ishiba’s reputation as a monetary hawk has prompted market participants to reassess their positions, particularly after recent Bank of Japan (BOJ) minutes revealed caution regarding near-term rate hikes. ING strategists consider the yen’s current weakness to be temporary.

EUR/USD: Inflation Data Shapes ECB Expectations

The euro continued its decline, falling 0.4% to $1.1085 after German inflation reached its lowest point since 2021. This development places pressure on the European Central Bank (ECB) to consider another rate cut in October. Deutsche Bank has updated its forecast, now predicting an additional cut this month. ECB President Christine Lagarde’s statements about inflation returning to target have fueled speculation about the central bank’s next move.

Gold Market: Safe-Haven Appeal and Yield Effects

Gold prices experienced a modest increase, supported by safe-haven demand due to geopolitical tensions in the Middle East and lower U.S. bond yields. The benchmark 10-year U.S. Treasury yield decreased, enhancing the attractiveness of non-yielding assets like gold. Analysts suggest that a higher-than-expected U.S. unemployment rate could reinvigorate gold’s upward trend, with Goldman Sachs adjusting its 2025 gold price forecast to $2,900 per ounce.

Market Outlook: Key Factors Under Observation

As the Fed signals a cautious stance on rate cuts and critical U.S. economic data approaches, the dollar may continue its upward trend in the short term. However, a stronger-than-anticipated jobs report could trigger a pullback. The yen might find support from Japan’s recent political changes, while the euro is expected to face ongoing pressure from weak inflation data. Gold’s prospects are influenced by heightened geopolitical risks and central bank policy expectations.