Forex Today: US Dollar slides as markets reassess odds of large Fed rate cut

Here is what you need to know on Friday, September 13:

Following the bullish action seen in the first half of the week, the US Dollar (USD) Index turned south on Thursday and erased all of its weekly gains. The index struggles to gain traction early Friday and edges lower toward 101.00. Eurostat will release Industrial Production data for July and the US economic docket will feature August Export Price Index and Import Price Index data, alongside the University of Michigan's Consumer Sentiment Survey for September.

Soft producer inflation data from the US revived expectations for a large Federal Reserve (Fed) rate cut at the policy meeting next week, causing the USD to weaken against its major rivals. On a yearly basis, the Producer Price Index (PPI) rose 1.7% in August, down from 2.1% in July and below the market expectation of 1.8%. Additionally, the improving risk mood put additional weight on the USD's shoulders. Early Friday, US stock index futures trade flat and the 10-year US Treasury bond yield stays in negative territory at around 3.65%.

The European Central Bank (ECB) announced on Thursday that it lowered the deposit facility rate, also known as the benchmark interest rate, by 25 basis points (bps) to 3.5% as expected. In the post-meeting press conference, ECB President Christine Lagarde refrained from hinting on whether they are planning to ease policy further in the near term. EUR/USD gathered bullish momentum in the second half of the day on Thursday and rose more than 0.5%, snapping a four-day losing streak.

GBP/USD benefited from improving risk mood and the renewed USD weakness on Thursday and gained over 0.6%. The pair stays relatively quiet and trades in a tight channel above 1.3100 in the European morning.

Fitch Ratings said in its latest report that they expect the Bank of Japan’s (BoJ) to hike rates to 0.5% by the end of 2024, 0.75% in 2025 and 1% by end-2026. After closing the day marginally lower on Thursday, USD/JPY continues to stretch lower in the European morning and was last seen losing 0.5% on the day at 141.10.

Gold surged higher in the second half of the day on Thursday and reached a new record-high of $2,570 during the Asian trading hours on Friday. Although XAU/USD retreated slightly, it holds above $2,560 and remains on track to post strong weekly gains.