Dollar crashes on inflation data

Key points

• October CPI came in lower-than-expected with headline inflation reaching 3.2%
• US dollar lost more than 200 pips against British pound and 180 pips against the euro
• Markets are currently pricing in a 64% chance of the Fed cutting rates by 100 basis points or more in the next year*

Lower CPI, lower US dollar

Tuesday, US dollar experienced a significant decline against major currencies such as the pound, euro, and Australian dollar. This decline was prompted by the release of lower-than-expected CPI inflation data in the U.S - both headline and core inflation missed expectations. By the end of the day, the dollar lost over 200 pips against the pound, around 180 pips against the euro, and approximately 130 pips against the Australian dollar. This marked the worst day of 2023 for the dollar against the pound and euro.

The decrease in inflation, which is moving closer to the Federal Reserve's 2% target, has raised expectations that the Fed may halt its interest rate hikes or even start cutting rates. Such expectations are sure to have a negative impact on the dollar, as the US currently touts higher interest rates than other major countries. The dollar has strengthened this year due to rising U.S. interest rates, but now faces relative weakness as rates are expected to decline.

Where are interest rates headed?

Currently, the market is pricing in a 64% chance of the Fed cutting rates by 100 basis points or more within the next year. The highest probability is for rates to drop to around 4.5%, which is 100 basis points lower than the current rate. There is also a slight chance that rates could go below 4% by the end of 2024.*

However, it is important to note that market sentiment can change quickly. Earlier this month, U.S. interest rate markets were making new highs, so it is possible for the dollar to regain strength if expectations shift again.

If inflation continues to decrease and interest rate cuts are priced in, the dollar may further depreciate. On the other hand, if interest rate expectations shift back towards high rates for longer, the dollar could regain strength. Forex markets are volatile, and these factors will continue to influence the direction of the dollar in the coming months.

*Projections based on the CME's FedWatch tool for 12/18/2024

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex provider like IG. USD pairs can be found in IG's platform under the 'USD Pairs' pairs tab. Many traders also watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s Trading Academy. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.