US Dollar Forecast: DXY Rebound Faces Test from Friday’s PCE, Sentiment Data

US Dollar Index Ends Volatile Week Near Resistance as Yields Offset Fed Easing

The U.S. Dollar Index (DXY) ended last week fractionally higher at 97.646, up 0.031 or +0.03%, after a volatile stretch dominated by the Federal Reserve’s rate decision and bond market reactions. Despite plunging to a multi-year low of 96.218 midweek, the index staged a sharp rebound, driven by a surge in U.S. Treasury yields, closing just below key technical resistance.

Fed Cuts Rates, Market Questions Policy Impact

On Wednesday, the Federal Reserve delivered a widely expected 25 basis point cut, lowering the federal funds rate to 4.00–4.25%. The central bank’s updated dot plot showed most FOMC participants expect two more cuts by year-end. While dissent was limited, Governor Stephen Miran’s push for a deeper 50 bp cut highlighted mounting political pressure for faster easing.

The Fed described the move as “risk management,” citing slower job growth and substantial downward revisions to prior labor market data. With August’s unemployment rate climbing to 4.3% and nearly one million fewer jobs reported over the past year, concerns about employment deterioration are intensifying.

Treasury Yields Rise, Lifting the Dollar

In a move that contradicted typical easing responses, long-term Treasury yields rose sharply. The 10-year yield climbed to 4.135% by Friday, while the 30-year yield pushed toward 4.76%. These moves reflect persistent inflation concerns and stronger GDP expectations. The yield rally helped lift the DXY from its 96.218 low, as real rates remain attractive.

Labor Data Offers Temporary Reprieve

Weekly jobless claims dropped to 231,000, reversing the prior week’s spike and alleviating fears of a deepening labor market downturn. While the broader employment picture remains softer, the near-term improvement contributed to the dollar’s technical rebound and supported market sentiment.

Market Forecast: Focus Shifts to PCE and Sentiment Data

Looking ahead, all eyes turn to Friday’s release of the Fed’s preferred inflation gauge — the August Personal Consumption Expenditures (PCE) Price Index — and the final September read on University of Michigan Consumer Sentiment. The July data showed core PCE rising 2.9% YoY, its highest since February, and Fed projections suggest inflation will remain above target through 2026.

These data will be pivotal. Continued elevation in core PCE or inflation expectations could reduce the likelihood of aggressive rate cuts, potentially reinforcing dollar strength. Conversely, signs of cooling prices or softening sentiment — particularly after preliminary Michigan data showed consumer confidence fell sharply and long-run inflation expectations rose to 3.9% — could reintroduce dovish bias.

With DXY pressing toward technical resistance at 98.238 and 99.098, a decisive break requires confirmation from these macro catalysts. Until then, the long-term downtrend remains in effect, but a sustained yield advantage and sticky inflation may keep the dollar supported near-term.

More Information in our Economic Calendar.