The dollar is gaining strength after a drop following the Jackson Hole event. Markets are adapting to the Federal Reserve Chair’s softer approach, with many expecting a rate cut in September. Fed funds futures show an 87% chance of a rate cut next month. All eyes are now on the US jobs report due on September 5, as traders are being more cautious compared to their previous excitement.

The Bond Market and Yield Curve

The bond market is important, especially with the yield curve becoming steeper. Traders are now predicting two rate cuts of 25 basis points each this year, in line with analysts who foresee cuts in September and December. If traders aren’t expecting consecutive cuts from September to December, dovish expectations may have hit a cap. This limit is helping the dollar recover this week, as already priced-in dovishness prevents further declines. The EUR/USD pair has dropped by 0.4%, losing recent gains and nearing three-week lows. Concerns about French politics and uncertainties in US-EU trade are also weighing on the euro. In other markets, the dollar is showing steady improvements after the fluctuations following Jackson Hole. The USD/JPY has risen by 0.3%, while GBP/USD has fallen by 0.3%. Month-end dynamics will also affect currency moves before major economic data is released.

Focused Analysis Ahead

The dollar is strengthening this week, but we should be cautious. The anticipated rate cut in September is widely expected and heavily priced into the market. Fed funds futures indicate an 87% probability of a 25 basis points cut, leaving limited room for more dovish surprises. Therefore, the dollar may move sideways or slightly rise until new data comes in. The U.S. jobs report on September 5 will be key for the Fed’s next decision. Market expectations are forming around an increase of about 180,000 jobs for August, a decrease from the 209,000 jobs added in July. A number significantly lower than this could strengthen the case for a September rate cut and weaken the dollar. Conversely, a stronger report could challenge current market pricing. For options traders, this situation sets up a classic volatility play instead of a straightforward bet on the dollar’s direction. With high expectations for a rate cut, implied volatility in dollar pairs could be underpriced before the jobs report. Buying straddles or strangles on major pairs like EUR/USD could be a cost-effective way to profit from a bigger-than-expected market move in either direction. We also need to monitor the bond market, where the yield curve is steepening. Typically, a steepening curve suggests expectations of future economic growth or inflation, which seems contradictory to the Fed’s plans to cut rates. This contradiction could mean bond traders are looking beyond a near-term slowdown, creating a complex scenario for currency markets. The EUR/USD pair appears particularly weak, having fallen below the 1.1600 level and losing all post-Jackson Hole gains. Concerns about France’s budget negotiations with the EU and ongoing U.S.-EU trade tensions over digital services taxes are weighing on the euro. One-month options data now indicate a higher demand for puts, meaning traders are willing to pay more to guard against further declines in the euro. In other areas, the dollar’s movements are more stable. GBP/USD has dipped but remains above its 100-day moving average around 1.3433, supported by persistent UK inflation data, which stayed above 3% in early August. On the other hand, USD/JPY is reacting to changes in U.S. Treasury yields, making it sensitive to the jobs report results. As we near the end of the month, be mindful that portfolio rebalancing activities may create some erratic and misleading price movements. It’s essential to look beyond this short-term noise and focus on positioning for the non-farm payrolls report. These month-end adjustments often do not reflect the fundamental trends. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now