The dollar is continuing to decline in August, driven by the latest US Consumer Price Index (CPI) report, which showed little change in July’s inflation. This has put more pressure on the currency, as traders expect the Federal Reserve to make shifts in policy.

Current Currency Trends

The EUR/USD has increased by 0.3% and is trading above 1.1700, its highest point in over two weeks. However, options set to expire at this level may limit further increases. The USD/JPY has dropped to 147.60 from 148.00, while the GBP/USD is up by 0.3%, reaching three-week highs at 1.3535. In addition, the AUD/USD has broken through resistance at 0.6540, moving up to 0.6550. Market expectations suggest that the Federal Reserve may adopt a more cautious approach in September. Traders are anticipating around 60 basis points of rate cuts by the end of the year. However, further dollar depreciation could lead to poorer market sentiment. Technically, the dollar remains weak, and the downward trend continues. The EUR/USD may target 1.1800, while the GBP/USD could approach late July highs just below 1.3600. Nonetheless, any further gains in these currency pairs will likely depend on a significant shift in dollar sentiment. The US dollar is showing notable weakness this August, and this trend is expected to continue in the coming weeks. The recent US CPI report for July 2025 confirmed this, revealing that core inflation increased only 0.1% month-over-month, falling short of expectations. This follows a disappointing July jobs report, where Non-Farm Payrolls totaled just 155,000, compared to the expected 190,000.

Economic Indicators and Market Strategy

This economic slowdown reinforces our belief that the Federal Reserve will take a more cautious approach during its September meeting. Current market pricing reflects this view, with the CME FedWatch Tool showing over an 85% chance of a 25-basis-point rate cut next month. Traders are now expecting about 60 basis points of total cuts by the end of 2025. For derivative traders, buying call options on currencies likely to rise against the dollar, such as EUR/USD and GBP/USD, is advisable. This strategy allows participation in potential upsides while limiting risks if dollar sentiment changes unexpectedly. Implied volatility has increased to three-month highs, raising option prices, but this expense can act as protection against sudden market changes. Looking at the charts, EUR/USD rising above 1.1700 is significant. However, we must consider the large option expirations at that level, which may momentarily limit gains. The next major target is 1.1800, a level not seen since June 2025. A strong move through this option barrier would indicate further gains. Similarly, GBP/USD is expected to test its recent highs just below 1.3600. The pair has gained impressive momentum, and with the Bank of England’s policy appearing less cautious than that of the Fed, the outlook is likely upward. Traders may find put options on USD/JPY appealing as the interest rate differences between the US and Japan narrow, with a possible target near the 146.00 support level. Looking back at past Fed easing cycles, like in 2019, the dollar often experiences extended weakness once rate cuts are confirmed and implemented. We believe a similar situation is developing now, even if the initial moves are volatile. Any decline in global risk confidence could slow the dollar’s drop, but the primary trend seems set for the near future. Create your live VT Markets account and start trading now.

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