US Dollar Forecast: DXY Falls to 5-Week Low as Fed Rate Cut Bets Rise on Jobs Data

Dollar Hits 5-Week Low as Traders Brace for Fed Signals and Jobs Data

The US Dollar Index (DXY) dropped to a five-week low of 97.536 on Monday, as traders positioned ahead of key US labor market releases and rising expectations of Federal Reserve policy easing.

August closed with a 2.2% loss for the index, extending a softening trend as the dollar slipped 0.12% intraday to 97.739. With the market pricing in a 90% probability of a 25 basis-point cut this month and 100 bps of easing through 2026, the dollar’s downside risks remain in focus.

The week’s economic calendar includes JOLTS, ADP private payrolls, and Friday’s closely watched nonfarm payrolls report. Analysts believe that continued labor market softening would support the dovish Fed narrative. Societe Generale’s Klaus Baader said that if recent economic weakness proves real, a more aggressive Fed response may follow.

However, if prior data weakness turns out to be overstated, expectations for policy loosening could be curtailed, especially with inflation pressures still looming.

Fed Independence Under Political Spotlight

Ongoing political friction has added uncertainty. Former President Trump’s attempt to remove Fed Governor Lisa Cook and a court ruling striking down much of his tariff policy have reignited debate about Fed independence. While Jefferies economists see limited market impact from the court case, the broader issue of “fiscal dominance” — where central banks are pressured to support government deficits — could weigh on sentiment.

Deutsche Bank strategist George Saravelos noted that markets have yet to reflect any increased risk premium or inflation concerns stemming from these developments. But sustained political interference could complicate the Fed’s path and undermine market confidence in US monetary policy.

Dollar Slips as Euro and Sterling Advance

The dollar also weakened against major peers. EUR/USD rose 0.35% to $1.1724, while GBP/USD edged up 0.18% to $1.3528. Despite mounting political risks in Europe, including a potential defeat for the French government in a budget confidence vote, analysts see limited impact on the euro unless systemic eurozone risk re-emerges.

Technical Picture: Breakdown Targets Lower Lows

Technically, DXY remains below both the 50-day (98.000) and 200-day (102.578) SMAs, reinforcing bearish structure. Resistance near 98.317–98.834 has held firm, while support at 97.556 is being tested. A clear break lower would expose 97.109 and 96.377 if bearish momentum builds.

Market Forecast: Downside Risks Dominate into Labor Data

With labor market data likely to guide the Fed’s near-term stance, the dollar remains vulnerable. The bearish technical break and mounting policy uncertainty suggest further downside is likely unless data significantly beats expectations. Upside moves remain capped below 98.834, with bears eyeing a move toward 96.377 if support at 97.556 gives way.

More Information in our Economic Calendar.