After a brutal Thursday session, the USD Index is showing signs of life. Rates have rebounded above 96.500 and are threatening to extend intraday highs. Gains versus the Euro, Canadian dollar, and Japanese yen have been the primary drivers of the rally.

The Greenback’s strength today is a bit confusing considering the growing optimism over a ½ point rate cut. The CME FEDWatch Index is currently showing a 20% week-over-week gain in the odds of rates being cut by ½ point at the 31 July FOMC meeting. At press time, the CME FEDWatch projects a 100% chance of a rate cut; 56.9% for a ¼ point and 43.1% for ½ point reduction.

USD Index Cuts Into Thursday’s Losses

The USD Index is back in the green, bouncing from the 96.000 handle yesterday. September USD Index futures are echoing the positive sentiment, establishing trade above 96.750.

Overview: For now, the daily uptrend in this market remains valid. Rates are back above the key 38% Current Wave Retracement (96.495), preserving a near-term bullish bias.

Given the lack of economic events facing the Greenback until late next week, the USD Index may be in a position to extend today’s gains. However, the growing optimism in a ½ point rate cut is the key driver of this market. If we see another episode of “rate-cut mania” like we did in June, then look for the Greenback to reverse its bullish course very quickly.