DXY Forecast: Steep Break Below 96.377 Possible as Fed Signals Two More Rate Cuts

DXY Slips as Fed Cuts Rates and Signals More Easing Ahead

The U.S. Dollar Index (DXY) fell sharply on Wednesday, reversing earlier strength after the Federal Reserve delivered a widely expected 25 basis point rate cut and signaled that two more cuts are likely before year-end. The index dropped toward the key support level at 96.377 — its lowest since July 1 — exposing the possibility of a deeper decline toward the multi-month low at 95.137 if the easing bias continues to gain traction.

Federal Reserve Cuts, But Political Influence Adds Complexity

In an 11-1 vote, the Federal Open Market Committee lowered the fed funds rate to a target range of 4.00% to 4.25%. Notably, Governor Stephen Miran dissented, pushing for a more aggressive half-point cut. His stance aligns closely with President Trump’s calls for faster and deeper easing, which have included vocal pressure on the Fed to slash rates to support the housing sector and lower government borrowing costs.

The decision showed less internal resistance than expected, with Governors Michelle Bowman and Christopher Waller both backing the quarter-point move. Waller, whose concern over labor market deterioration is well known, has emerged as a key voice arguing for preemptive easing to head off economic softening.

Labor Market Concerns Driving Dovish Shift

The Fed’s statement acknowledged “moderated” economic activity and highlighted that “job gains have slowed,” pointing to elevated downside risks to employment. Recent labor data has reinforced these concerns: August’s 4.3% unemployment rate marks the highest since late 2021, while a major downward revision from the Bureau of Labor Statistics showed nearly one million fewer jobs created than previously reported over the past year.

These developments have put the Fed’s dual mandate — stable prices and maximum employment — in direct conflict, with rising inflation still lingering above target but the jobs market clearly showing cracks.

Dot Plot Reveals Division on Path Forward

The Fed’s updated “dot plot” reflected internal division: 10 participants expect two more cuts this year, while 9 see just one. One participant — likely Miran — forecasted up to 125 basis points in further reductions. While market pricing had already fully anticipated this week’s move, the official guidance suggested a slower pace of cuts in 2026 and 2027, highlighting a wide gap between Fed projections and market expectations.

Market Forecast: Dollar Outlook Bearish Below 96.377

DXY’s breach of 96.377 would likely open the door to further downside toward 95.137, especially if upcoming data reinforces soft labor trends. Unless inflation reaccelerates unexpectedly or the Fed signals concern over its credibility, traders should expect continued dollar softness. Resistance likely forms near 97.25, with a bearish bias intact as long as rate cut expectations remain dominant.

More Information in our Economic Calendar.