US Dollar Forecast: Will DXY Rally Continue or Collapse on NFP Data?

U.S. Dollar Edges Higher Ahead of Critical Jobs Report

The U.S. Dollar Index is edging higher late Thursday. After hitting its highest level since December 10 earlier in the session, the market has given up most of those gains as investors squared positions ahead of Friday’s U.S. Non-Farm Payrolls report.

Rate Cut Expectations Could Pressure Dollar in 2026

At the end of 2025, several reports suggested the European Central Bank would hold rates steady while the Federal Reserve was expected to cut aggressively in 2026. This divergence could weaken the dollar significantly, especially if tomorrow’s Non-Farm Payrolls report is weak enough to convince the Fed to cut rates sooner than expected or more aggressively than projected in its December monetary policy report.

Euro Zone Inflation Data Lifts Greenback

On Thursday, the greenback gained ground against a basket of major currencies, led mostly by a drop in the Euro, which fell following softer Euro Zone inflation data. Big moves in the single-currency have a huge impact on the dollar index because of its 57% weighting.

At 21:13 GMT, DXY is trading 98.915, up 0.186 or +0.19%. This is down from an intraday high of 98.984.

Geopolitical Risk-On Offset by Weak Economic Data

It’s been a strange week for the dollar. The greenback initially gained Monday on safe-haven buying tied to the U.S. capture of Venezuelan President Nicolas Maduro. However, the geopolitical risk premium quickly evaporated when the situation didn’t escalate. Then the dollar fell sharply after U.S. data showed manufacturing activity had contracted more than expected in December, falling to a 14-month low. The impact of the geopolitics was completely offset by the weak economic data.

Market Awaits Jobs Data as Rate Cut Bets Drive Risk Assets

Now traders are focused on what’s really happening in the U.S. labor market. The NFP report has taken on added significance because investors want to see evidence supporting more aggressive dovish moves by the Fed. Gold, silver, and stocks are all trading at or near all-time highs simultaneously—largely driven by expectations of at least two Fed rate cuts in 2026.

Ahead of the NFP report, Fed funds futures are pricing in around an 82% chance that interest rates will remain on hold at the Fed’s next meeting on January 27-28, according to the CME Group’s FedWatch tool.

Dollar Rally Nearly Fully Priced

At 82%, the probability of no rate cut is nearly fully priced at 100%, suggesting the dollar’s rally may be exhausted. It would take a significant jump in the odds of a rate cut—or conversely, a drop in the odds of rates remaining on hold below 50%—to drive the dollar materially lower from current levels.

Fed Speakers Signal Growing Concerns

Three Fed officials this week have expressed concerns that point toward a bearish bias for the dollar. Richmond Fed President Tom Barkin said on Tuesday that Fed interest rate changes will need to be “finely tuned” to incoming data given risks on both the Fed’s unemployment and inflation goals. Fed Governor Stephen Miran said earlier this week that the Fed needs to cut interest rates aggressively this year to keep the economy moving forward. Minneapolis Federal Reserve President Neel Kashkari told CNBC on Monday he sees a risk that the jobless rate could “pop” higher.

Key Takeaway Before Jobs Report

So here’s where the market stands ahead of tomorrow’s jobs report: the U.S. Dollar is at a one-month high, the odds of no rate cut in January are sitting at nearly 100%, yet three Fed members are signaling risks to the Fed’s dual mandate and the broader economy.

Technical Outlook: Testing Key Moving Averages

Technically, DXY pierced the 200-day moving average at 98.873, falling short of 50% resistance at 99.027 and the 50-day moving average at 99.081 before falling back below the longer-term indicator.

Overtaking the moving averages will suggest the presence of buyers, but gains are likely to be capped by the retracement zone at 99.072 to 99.384 unless the top of the zone is taken out with conviction. On the downside, bearish traders will target 98.307 if the jobs report is bearish.

More Information in our Economic Calendar.