US Dollar Forecast: Bearish Outlook Builds After Powell Flags Labor Market Risks

Powell’s Jackson Hole Remarks Send Dollar Lower as Yields Sink

The U.S. Dollar Index (DXY) dropped sharply on Friday after Federal Reserve Chair Jerome Powell indicated that interest rate cuts could be considered as early as the September FOMC meeting. Speaking at the Fed’s annual symposium in Jackson Hole, Powell acknowledged growing downside risks in the labor market, prompting traders to recalibrate their expectations on the Fed’s rate path.

The DXY fell 0.90% to 97.73, breaking below both the 50-day SMA at 98.1 and the near-term support of 97.859. The decline gathered pace after Powell said the balance of risks “may warrant” an adjustment to the current restrictive policy stance. The index had previously hovered near 98.7 before the comments, but sellers accelerated on rising bets for a September rate cut.

Labor Market Comments Shift Market Sentiment

Powell’s acknowledgment that “downside risks to employment are rising” sparked immediate market repricing. Treasury yields dropped in tandem: the 10-year yield fell 7.6 basis points to 4.256%, while the 2-year slid nearly 10 basis points to 3.698%. The sharp move lower in front-end yields signaled markets are anticipating near-term easing.

Fed fund futures reflected this shift. According to CME’s FedWatch tool, the probability of a September rate cut surged to 91%, up from 72% earlier in the day. Traders are now pricing in 56 basis points of total cuts by year-end, suggesting a full pivot in Fed expectations.

Powell stopped short of confirming a cut, emphasizing the Fed would continue to “move carefully,” but dovish undertones were clear. The market reaction was swift: the euro rose 1.2% to $1.1739, while USD/JPY dropped 1.2% to 146.62.

DXY Technical Picture Weakens Below Key Levels

Technically, the DXY has breached key levels, closing below both the 50-day and 200-day SMAs. Price failed to hold above 98.317 intraday and reversed sharply from resistance at 98.834, this week’s high. The breakdown leaves the index vulnerable to a test of 97.109, with 96.377 the next key support if downside pressure intensifies.

On the upside, initial resistance sits at 98.1, with stronger supply at 99.177 and 99.320. The recent high at 100.257 now marks a significant barrier unless yield expectations reverse.

Market Forecast: Fed Caution Tilts DXY Bearish

With Powell signaling rate cuts are on the table and front-end yields falling, the DXY now faces downward pressure heading into September.

Unless incoming labor market data invalidates the Fed’s dovish shift, dollar rallies are likely to be sold.

The technical breakdown below moving averages and dovish Fed tone combine to keep risks skewed to the downside, with 96.377 in sight if sellers maintain control.

More Information in our Economic Calendar.