US Dollar Forecast: USD Dump Extends on Fears of 3 Fed Cuts This Year

US Dollar Key Points

• After a depressing jobs report and yesterday’s ho-hum inflation report, traders have essentially fully discounted a Fed interest rate cut in a month’s time.
• Fears of interest rate cuts in the US have weighed on the greenback, making the US Dollar the weakest major currency on the day and week so far.
• If DXY breaks support, the next levels to watch are the late-July low near 97.15, followed by the multi-year low set on July 1 around 96.40

That’s one way to take the drama out of a Federal Reserve meeting!

Just two weeks ago, traders were pricing in 60% odds that the US central bank would keep interest rates unchanged in the 4.25-4.50% range in its September meeting. Now, after a depressing jobs report (including more than a quarter million in negative revisions to the previous two months’ jobs reports) and yesterday’s ho-hum inflation report, traders have essentially fully discounted a Fed interest rate cut in a month’s time:

Source: CME FedWatch

Perhaps more to the point, markets are now discounting 61bps of Fed easing by the end of the year, corresponding to two or three 25bps interest rate cuts across the Fed’s last three meetings of the year; US Treasury Secretary Bessent was even on the wires this morning calling for a 50bps rate cut in September and continued cuts from there!

In my view, the historically conservative central bankers that make up the FOMC are unlikely to shift immediately to such aggressive easing, especially given the hotter-than-expected Core CPI reading yesterday, but the Treasury Secretary’s comments certainly speak to a shifting “Overton Window” in terms of Fed expectations.

Of course, we still have one more jobs report and another CPI inflation release (as well as the Jackson Hole Symposium later this month) before next month’s FOMC meeting, but any surprises relative to expectations are likely to impact traders’ expectations for the October and December FOMC meetings more than the immediate outlook for a 25bps rate cut.

Needless to say, all the talk about interest rate cuts in the US has weighed on the greenback, making the US Dollar the weakest major currency on the day and week so far, while risk assets like equity indices and cryptoassets are testing record highs.

US Dollar Index Technical Analysis: DXY Daily Chart

Source: StoneX, TradingView

From a technical perspective, the US Dollar Index (DXY) reversed back lower off its 100-day MA after the NFP report and is now back testing its near-term bullish trend line in the upper-97.00s. While there is technical scope for a near-term bounce off that potential support level, it’s worth noting that the 14-day RSI has already broken below its equivalent trend line, hinting at a breakdown in the dollar index itself.

If we do see a downside break today, the next support levels to watch are the late-July low near 97.15, followed by the multi-year low set on the first day of the second half of the year around 96.40. Even if we do see a near-term bounce, the longer-term trend will remain to the downside as long as prices remain below the 100-day MA in the lower-99.00s.

-- Written by Matt Weller, Global Head of Research

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