US Dollar Forecast: Sticky Inflation and Rate Cut Expectations Drive GBP/USD and EUR/USD

Market Overview

The US Dollar Index (DXY), which measures the greenback against six major currencies, held near $97.95 in Asian trading on Monday. While the index shows resilience, gains remain limited as investors weigh the risk of a potential US government shutdown and mounting expectations for Federal Reserve rate cuts later this year.

Shutdown Risk Adds Uncertainty to Dollar Outlook

Political developments in Washington are keeping traders cautious. With funding for federal operations set to expire on Wednesday, the first day of the 2026 fiscal year, markets are bracing for the possibility of a partial shutdown. Lawmakers remain divided, and failure to reach a deal could disrupt key government functions and dampen investor confidence in the dollar.

The Congressional Budget Office has previously estimated that the 2018–2019 shutdown reduced GDP by $11 billion, highlighting the potential economic consequences of prolonged gridlock.

Inflation Data Reinforces Sticky Price Narrative

On the economic front, the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, underscored persistent price pressures. Headline PCE rose 2.7% year-on-year in August, up from 2.6% in July, while core PCE, which excludes food and energy, remained unchanged at 2.9% YoY.

On a monthly basis, headline PCE gained 0.3% and core PCE increased 0.2%. The data points to inflation that remains above target, complicating the Fed’s balancing act between supporting growth and containing prices.

Markets Price in October and December Cuts

Despite elevated inflation, traders continue to bet on monetary easing. According to the CME FedWatch Tool, markets assign a 90% probability of a rate cut in October and nearly 65% odds of another cut in December.

This dovish outlook has capped the dollar’s upside momentum as investors anticipate policy adjustments aimed at cushioning economic risks.

Fed Officials’ Remarks to Guide Near-Term Sentiment

Attention now turns to comments from Federal Reserve officials, including Governor Christopher Waller, Cleveland Fed President Beth Hammack, and New York Fed President John Williams.

Their speeches later Monday could provide critical signals on how the central bank views inflation risks, growth prospects, and the potential timing of rate cuts.

A more hawkish tone could lend temporary support to the dollar, though broader fiscal and policy uncertainties continue to weigh on the outlook.

US Dollar Index (DXY) – Technical Analysis

The U.S. Dollar Index (DXY) is holding near $97.95, testing support at the lower boundary of its rising channel. The index recently pulled back from $98.56, where sellers stepped in, but remains above both the 50-EMA ($97.94) and 200-EMA ($97.71), keeping the short-term structure intact.

The RSI at 55 shows momentum has cooled from overbought levels, suggesting a period of consolidation rather than immediate downside pressure. A rebound from current levels could see price retest $98.30–$98.50, while a close below $97.90 risks further losses toward $97.20.

GBP/USD Technical Analysis

The GBP/USD pair is trading around $1.3438, recovering after a steep decline earlier in the week. Price has broken above a descending trendline, hinting at a shift in short-term momentum. Immediate resistance sits near $1.3467, where the 50-EMA ($1.3431) and 200-EMA ($1.3493) converge, forming a key barrier.

If buyers sustain momentum, the next upside target lies around $1.3527–$1.3590. On the downside, support is seen near $1.3386 and then $1.3340. The RSI at 60 suggests improving strength but not yet stretched, giving room for further upside if resistance breaks.

EUR/USD Technical Forecast

The EUR/USD pair is trading near $1.1723, attempting to recover after a sharp drop last week. Price is testing a descending trendline that has capped upside momentum since mid-September. The 50-EMA ($1.1725) and 200-EMA ($1.1737) are converging, creating a near-term resistance zone. If buyers manage to sustain above this cluster, the pair could push toward $1.1790–$1.1810.

However, rejection here would likely pull EUR/USD back toward $1.1660 and possibly $1.1615. The RSI at 56 suggests improving momentum but still short of overbought levels.