US Dollar Forecast: Bearish Momentum Builds on DXY Ahead of Key CPI Data

Dollar Index Slips Below Key Support as Labor Weakness Fuels Fed Cut Bets

The U.S. Dollar Index (DXY) edged lower on Monday, slipping 0.2% to 97.7, extending losses from Friday when weak labor data triggered a sharp selloff. After closing below the 50-day moving average late last week, the dollar continues to trade on the back foot, pressured by mounting expectations of aggressive Federal Reserve easing later this month.

Friday’s low of 97.430 is currently acting as immediate support. A breach below this level could accelerate downside momentum toward the July 24 bottom at 97.109. On the upside, traders are watching resistance at the pivot level of 97.859, followed by the 50-day moving average at 98.100 and another pivot at 98.317.

Federal Reserve in Focus After Weak Nonfarm Payrolls

August’s nonfarm payrolls report showed a significant deceleration in hiring, with job growth slowing sharply and the unemployment rate rising to 4.3%—the highest in nearly four years. The data prompted a swift repricing in rate expectations. Fed funds futures now reflect a 10% chance of a 50-basis-point rate cut this month, up from zero last week, according to the CME FedWatch Tool.

MUFG currency strategist Lee Hardman noted that despite the DXY falling below the key 98.000 level, the reaction was less severe than the move in short-term yields implied. He added that the weak payrolls report reinforces expectations for the Fed to resume rate cuts, potentially starting with a larger move.

Political pressure on the Fed is also intensifying. U.S. Treasury Secretary Scott Bessent called for more scrutiny of the central bank’s rate-setting powers, while President Trump continues to consider replacing Jerome Powell as Fed Chair.

Treasury Yields Decline as Traders Eye Inflation Print

U.S. Treasury yields fell across the curve on Monday. The 10-year yield dropped to 4.053%, its lowest since April, while the 2-year yield slid to 3.484%. The 30-year yield declined more than 4 basis points to 4.716%. Falling yields reflect both the weak labor data and growing investor anticipation of this week’s inflation numbers.

The August Core CPI, due Thursday, is expected to rise 0.3% month-over-month. Deutsche Bank analysts noted this data could heavily influence Fed pricing, especially given the current media blackout period. Wednesday’s PPI release and Tuesday’s labor benchmark revisions are also on traders’ radar.

Market Forecast: Dollar at Risk of Further Breakdown

With DXY now below its 50-day moving average and Fed cut odds rising, near-term sentiment remains bearish. Unless upcoming inflation data surprises to the upside, the index appears vulnerable to further downside pressure, particularly if 97.430 fails to hold. Resistance between 97.859 and 98.317 remains firm, capping any bounce attempts.

More Information in our Economic Calendar.