The dollar faced scrutiny in trading due to mixed US data. Markets are now pricing in almost three 25 bps rate cuts by the Fed by year-end, leaving the dollar more vulnerable. EUR/USD rose above 1.1700, supported by the ECB, while USD/JPY fell from nearly 148.00 to 147.00, before a slight rebound.
Today shows limited commitment to follow through on yesterday’s moves. Major currencies remain largely unchanged, with the dollar stabilising. The sentiment keeps the dollar softer, anticipating Fed rate cuts next week. Further drops are limited as traders hesitate beyond 75 bps cuts, while September expects just a 25 bps move.
Focal Points for Traders
Traders currently price in around 71 bps rate cuts by year-end, with only a 7% chance of a 50 bps move next week. As the Fed meeting approaches, US data such as the University of Michigan consumer sentiment and retail sales will be focal points. These factors will influence how the Fed positions for October.
On the charts, AUD/USD is noteworthy after surpassing the July high of 0.6625, reaching levels not seen since November last year. From a technical perspective, the pair could see further gains.
We are seeing the US dollar on the back foot as markets have priced in nearly three rate cuts by the end of the year. The latest CPI report for August 2025, which showed inflation cooling to 2.4%, has solidified our view that the Fed has a green light to begin easing. This is why options markets are implying around 71 basis points of cuts before 2026.
Trading Opportunities
For those of us trading derivatives, this creates opportunities in options to position for further, but perhaps limited, dollar weakness. Buying short-dated call options on EUR/USD or AUD/USD ahead of next week’s Fed meeting could be a viable strategy. However, with so much easing already priced in, selling out-of-the-money puts on the dollar index could also work, as a major collapse seems unlikely for now.
The European Central Bank’s recent signal to hold rates steady has amplified the dollar’s slide, creating a clear policy divergence that supports EUR/USD above 1.1700. This reminds us of the ‘insurance cuts’ we saw from the Fed back in 2019, where they began easing to support the economy despite it not being in a full recession. This historical precedent gives us more confidence in the Fed’s dovish pivot.
We should keep a close watch on AUD/USD, which has broken decisively above its July 2025 high of 0.6625, a key technical milestone. A soft University of Michigan sentiment report later today or weak retail sales on Tuesday would reinforce the Fed cutting narrative and could propel the pair even higher. This technical breakout suggests the path of least resistance is upward for now.
