The dollar is under pressure in trading due to mixed economic data from the US. Investors expect about three rate cuts of 25 basis points (bps) each by the Fed by the end of the year, making the dollar more vulnerable. The EUR/USD pair rose above 1.1700, helped by the European Central Bank (ECB), while USD/JPY dropped from almost 148.00 to 147.00, before recovering slightly. Today, there’s not much commitment to continue yesterday’s trends. Major currencies are mostly standing still, with the dollar stabilizing. The overall sentiment keeps the dollar weaker as traders await Fed rate cuts next week. Further declines are likely limited, as traders are cautious about exceeding 75 bps in cuts, while a 25 bps cut is expected in September.

Key Points for Traders

Traders foresee approximately 71 bps of rate cuts by the end of the year. There’s only a 7% chance of a 50 bps cut next week. As the Fed meeting nears, US data like the University of Michigan consumer sentiment and retail sales will be crucial. These reports will shape the Fed’s strategy for October. On the charts, AUD/USD stands out after surpassing the July high of 0.6625, reaching levels we haven’t seen since last November. From a technical perspective, this pair could continue to rise. Currently, the US dollar is struggling as markets count on nearly three rate cuts by year-end. The latest Consumer Price Index (CPI) report from August 2025, showing inflation easing to 2.4%, indicates that the Fed may start easing policy. This drives the options market to predict about 71 bps of cuts before 2026.

Trading Opportunities

For those trading derivatives, opportunities arise in options as the dollar may weaken further, though not drastically. Buying short-dated call options on EUR/USD or AUD/USD ahead of next week’s Fed meeting could be a good strategy. However, with much easing already reflected in prices, selling out-of-the-money puts on the dollar index could also be effective, as a major fall seems unlikely for now. The ECB’s recent decision to keep rates steady has intensified the dollar’s decline, highlighting a clear policy gap that supports EUR/USD above 1.1700. This situation resembles the ‘insurance cuts’ the Fed made in 2019, where they began to ease to support the economy even without a full recession. This historical context adds confidence in the Fed’s dovish shift. We should closely monitor AUD/USD, which has clearly risen above its July 2025 high of 0.6625, a significant technical level. A weak University of Michigan sentiment report today or poor retail sales on Tuesday could strengthen the narrative for Fed rate cuts and push the pair even higher. This technical breakout indicates that the upward trend is likely to continue for now. Create your live VT Markets account and start trading now.

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