The dollar is on the rise following a decline after the Jackson Hole event. Markets are adjusting to the Federal Reserve Chair’s dovish stance, expecting a September rate cut.
Fed funds futures indicate an 87% chance of a rate cut next month. The focus is now on the US jobs report on 5 September, with traders displaying caution compared to earlier enthusiasm.
The Bond Market And Yield Curve
The bond market is crucial, with a steepening yield curve warranting attention. Currently, traders anticipate two 25 bps rate cuts this year, aligning with analysts’ expectations of cuts in September and December.
Unless traders expect consecutive cuts from September through December, dovish expectations have reached a limit. This ceiling is contributing to the dollar’s recovery this week, alongside already priced-in dovishness limiting further downside.
EUR/USD has seen a 0.4% decrease, erasing recent gains and approaching three-week lows. French political issues and US-EU trade uncertainties also impact the euro.
Across other markets, the dollar is showing steady improvements away from the volatile responses post-Jackson Hole. With USD/JPY rising 0.3% and GBP/USD declining 0.3%, month-end factors will also influence the currency’s trajectory ahead of significant economic releases.
Focused Analysis Ahead
The dollar is firming up this week, but we shouldn’t get carried away, as a Federal Reserve rate cut in September is already heavily factored into the market. Fed funds futures are showing around an 87% probability of a 25 basis point cut, leaving little room for more dovish surprises. This means the path of least resistance for the dollar might be sideways or slightly up until new data emerges.
All eyes are now on the U.S. jobs report due on September 5th, which will be the deciding factor for the Fed’s next move. We are seeing market consensus forming around expectations of about 180,000 new jobs for August, a slight slowdown from the 209,000 jobs we saw added in July 2025. A number significantly below this forecast would solidify the case for a September cut and could weaken the dollar, while a strong print could challenge the current market pricing.
For options traders, this sets up a classic volatility play rather than a pure directional bet on the dollar. With expectations so high for a rate cut, implied volatility on dollar pairs may be under-priced heading into the jobs number. Buying straddles or strangles on major pairs like EUR/USD could be a cost-effective way to profit from a larger-than-expected market move in either direction.
We also need to watch the bond market, where the yield curve has been steepening. Historically, a steepening curve can signal expectations of future economic growth or inflation, which seems at odds with the Fed preparing to cut rates. This divergence suggests that bond traders may be looking past a near-term slowdown, creating a complex picture for currency markets.
The EUR/USD pair is looking particularly vulnerable, having fallen back below the 1.1600 level and erasing all its post-Jackson Hole gains. Lingering concerns over France’s budget deficit negotiations with the EU and ongoing US-EU trade friction over digital services taxes are weighing on the euro. One-month options data now shows risk reversals with a growing bias for puts, meaning traders are paying a higher premium to protect against further downside in the euro.
Elsewhere, the dollar’s move is more contained. GBP/USD has dipped but is holding above its 100-day moving average near 1.3433, supported by the fact that UK inflation data from earlier in August 2025 remains stubbornly above 3%. Meanwhile, USD/JPY is sensitive to moves in U.S. Treasury yields, making it a direct play on the outcome of next week’s jobs report.
As we approach the end of the month, be aware that portfolio rebalancing flows could create some choppy and misleading price action. It would be wise to look past this short-term noise and focus on positioning for the non-farm payrolls release. These month-end adjustments often have little to do with the underlying fundamental trends.
