US Dollar Forecast: DXY Slips Below 50-Day MA as Fed Rate Cut Odds Hit 87% on PCE Data

Dollar Ends August Lower as Fed Cut Odds Climb

The dollar finished the month on the back foot, with the U.S. Dollar Index (DXY) settling at 97.855 on Friday, down 0.042 or 0.04%, closing out August with a 2.19% loss. Traders spent the final session adjusting positions for month-end and firming bets on a Federal Reserve rate cut in September, which now looks increasingly priced in.

PCE Stays Hot Enough to Keep the Fed in Focus

The July Personal Consumption Expenditures (PCE) index rose 0.2% on the month and 2.6% year-over-year, right in line with estimates. Core PCE accelerated slightly to 2.9% from June’s 2.8%, suggesting that inflation isn’t cooling as quickly as some would like. Still, money markets locked in expectations for easing, with CME’s FedWatch showing an 87% chance of a 25 basis point cut at the September 16–17 meeting, up from 63% at the start of the month. Fed Governor Christopher Waller publicly backed a September cut, and added that more reductions could follow to return rates to a neutral setting.

Treasury Yields Push Higher as Traders Look Ahead

Despite the rate cut narrative, Treasury yields ticked up. The 10-year closed at 4.232%, while the 30-year rose to 4.929%, both up slightly on the day. Moves were more muted on the short end of the curve, with the 1-month yield at 4.323% and the 2-year at 3.621%. Investors now turn their attention to next week’s nonfarm payrolls report, which could either validate or challenge the market’s dovish lean.

Political Pressure on the Fed Adds to Uncertainty

The dollar also contended with political stress from Washington. President Trump’s efforts to remove Fed Governor Lisa Cook resurfaced this week, with Cook seeking an injunction to block the move. No ruling came Friday, and the Fed itself remained neutral in legal filings, only requesting a prompt decision. A Cook exit could shift the board toward a more dovish tilt, an outcome currency markets are watching closely.

Euro Holds Gains as ECB Inflation Data Shows Stability

Across the Atlantic, euro zone inflation data showed French consumer prices rose less than forecast in August, while Spain’s annualized EU-harmonised inflation held at 2.7%. The euro edged up 0.12% to $1.1699, with the dollar also softening against the yen and Swiss franc.

Market Outlook: Dollar Consolidates as Rate Cut Looms

With the Fed’s preferred inflation gauge holding steady and political headlines stirring uncertainty, the dollar closed out August under pressure. Barring a surprise from payrolls, traders appear comfortable holding expectations for a September rate cut.

For now, the DXY remains capped below the 50-day moving average, with 98.317 still acting as resistance and 97.556 offering support. Until the data argues otherwise, the path of least resistance looks lower.

More Information in our Economic Calendar.