The US dollar is ending the month lower after a week of ups and downs. It started strong due to Powell’s dovish comments but finished the week down, likely affected by market sell-offs and month-end activities. Now, all eyes are on September, which has important events coming up like the NFP and CPI reports, and the FOMC meeting. Markets are predicting a rate cut with an 89% chance, and there’s an expectation of two total cuts this year, totaling 55 basis points.

Shift In Market Focus

Recent weaker NFP numbers and negative adjustments have shifted the market’s interest from inflation to the labor market. This change suggests that the Fed might see recent inflation increases as temporary, influencing more dovish expectations and market behavior. Strong data might lessen the chances of a September rate cut, while weak data could increase those expectations, putting further pressure on the dollar. The Fed’s independence could also significantly influence the dollar’s future performance. On the technical side, the US dollar is trading within a rising channel. After bouncing back in July from strong NFP data, it has been fluctuating while waiting for more clarity on monetary policy. On the daily chart, the dollar showed a rally after breaking a downward trendline, but soft NFP data negated that momentum. September is set to be a crucial month, with a strong likelihood of a weaker US dollar. The market sees an 89% chance of a Federal Reserve rate cut in the next meeting due to recent signs of a cooling labor market which the Fed is closely monitoring.

Crucial Upcoming Data

The last Non-Farm Payrolls report, released in early August 2025, revealed a job gain of only 145,000, missing expectations and featuring negative revisions to prior months. Meanwhile, PCE inflation data was at 2.8%, matching forecasts and indicating that the Fed is currently more worried about employment than prices. This makes the upcoming labor data vital for the dollar’s future direction. Next week’s ADP employment and ISM PMI reports will provide the first major insights into this dovish outlook. These reports will help gauge market sentiment before the official NFP and CPI reports later this month. If these reports show weak figures, it could bolster expectations for more aggressive rate cuts and push the dollar lower. For those of us in the derivatives market, this means we expect implied volatility in USD currency pairs to rise leading up to these data releases. A long volatility strategy, like buying a straddle on the EUR/USD, could be useful to capitalize on a significant price movement regardless of data results. On the flip side, strong data could trigger a sharp reversal, affecting traders who are positioned for dollar weakness. This market setup feels reminiscent of late 2023, when investors expected rate cuts in 2024, leading to a big drop in the dollar at the year’s end. The current risk is similar: if the data does not align with expectations, it could quickly unwind these dovish bets. Thus, it’s crucial to manage any directional positions with strict risk parameters. Technically, the dollar index is at a key point, trading within a long-term rising channel. A clear break below this channel’s lower boundary would support the bearish outlook and might lead to a decline toward the 90.00 level. We’ll be keeping a close eye on this level as it could signal the right time to extend bearish positions. Create your live VT Markets account and start trading now.

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