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Talking Points:

- The DXY Index has lost ground for three consecutive days, and is quickly approaching the bullish outside engulfing bar low from July 26.

- Higher inflationary pressures are lifting the Euro, offsetting concerns surrounding weaker than expected Q2'18 growth figures.

- Retail traders are net-short EUR/USD and net-long GBP/USD, leaving a mixed outlook for the US Dollar..

See our longer-term forecasts for the US Dollar, Euro, British Pound and more with the DailyFX Trading Guides

The US Dollar (via the DXY Index) is dropping for a third consecutive day as attention has momentarily shifted away from the Trump administration's ongoing trade wars and instead to central bank policy elsewhere.

With the Bank of Japan downgrading its inflation forecasts for fiscal years 2019 and 2020, the Japanese Yen has suffered as the era of extraordinary loose monetary policy is set to continue for the next few years - a shift in tone from just a few months ago when policy officials were discussing winding down their extraordinary efforts around the start of fiscal year 2019 (next April).

The tweaks made under BOJ Governor Kuroda's watch suggest that in a world where central banks are normalizing policy more and more, the Japanese Yen will remain a funding and safe haven currency amid interest rate differentials moving further out of its favor.

But the gains seen by USD/JPY overnight have been neutralized and then some by the rally in EUR/USD, leading the DXY Index lower once again. Even as Q2'18 Eurozone GDP missed expectations, the unexpected drift higher in the July Eurozone CPI reading has traders bidding the Euro up this morning.

In light of the fact that ECB policy is on a preset course, it doesn't appear that today's data will do anything to shake EUR/USD - or the DXY Index - out of its current sideways consolidation.

DXY Index Price Chart: Daily Timeframe (July 2017 to July 2018) (Chart 1)

EUR/USD Gains Weigh on DXY Index; Sideways Price Action Eyed

There seems little chance that the DXY Index's recent consolidation in the ascending triangle give way in either direction over the next 24-hours, particularly before the FOMC meeting tomorrow. For now, until a close above 95.53 (the June 21 bearish key reversal and the June 27 to 29 evening doji star candle cluster highs) or below 93.19 (the June 14 bullish outside engulfing bar low) is achieved, it's best to wait for a clearly defined break in price.

Reinforcing the view of more near-term consolidation is the lack of movement in rate hike odds on the US Dollar's side. On the last day of July, Fed funds futures are pricing in an 89% chance of a 25-bps rate hike in September (the third of 2018) and a 63% chance of a hike in December (the fourth of 2018). Coming into this week, odds for hikes in September and December were near 90% and 64%, respectively.

Read more: US-China Trade War Enters New Phase amid Yuan Depreciation

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX