The dollar continues its downward trend in August, influenced by the US CPI report showing no marked increase in July’s inflation. This has added pressure to the currency, as traders anticipate changes from the Federal Reserve.
Current Currency Trends
EUR/USD has risen by 0.3% to trade above 1.1700, marking a peak in over two weeks. However, option expiries at this level may restrain further gains. USD/JPY has fallen to 147.60 from a previous high of 148.00, while GBP/USD has increased by 0.3% to reach three-week highs at 1.3535. Meanwhile, AUD/USD is overcoming resistance at 0.6540, climbing to 0.6550.
Market expectations now lean towards the Federal Reserve adopting a more dovish approach in September. Traders foresee around 60 basis points of rate cuts by year’s end. Although, further depreciation of the dollar might necessitate worsening market sentiment.
Technically, the dollar remains weak as the trend downwards persists. EUR/USD may aim for the 1.1800 level, and GBP/USD could approach late July highs below 1.3600. Nonetheless, additional advances in these currency pairs likely depend on a significant change in dollar sentiment.
The US dollar is showing significant weakness this August, and we see this trend continuing in the weeks ahead. The recent US Consumer Price Index (CPI) report for July 2025 confirmed this, with core inflation rising only 0.1% month-over-month, missing expectations. This soft data follows the lackluster July jobs report, where Non-Farm Payrolls came in at just 155,000 against a forecast of 190,000.
Economic Indicators and Market Strategy
This economic cooling reinforces our view that the Federal Reserve will adopt a more dovish stance at its September meeting. Market pricing now reflects this, with the CME FedWatch Tool showing an over 85% probability of a 25-basis-point rate cut next month. Traders are currently pricing in approximately 60 basis points of total cuts by the end of 2025.
For derivative traders, this environment suggests buying call options on currencies poised to gain against the dollar, such as EUR/USD and GBP/USD. This strategy allows for participation in the upside potential while capping downside risk if dollar sentiment suddenly reverses. Implied volatility has ticked up to three-month highs, making options pricier, but this cost can be seen as insurance against unexpected market shifts.
Looking at the charts, EUR/USD breaking above 1.1700 is a key development, though we must be mindful of large option expiries at that level which could act as a temporary ceiling. We see the next major target as the 1.1800 handle, a level not seen since June 2025. A decisive move through the option barrier would be a strong signal for further gains.
Similarly, we expect GBP/USD to test its recent highs just below 1.3600. The pair has shown strong momentum, and with the Bank of England’s policy looking less dovish than the Fed’s, the path of least resistance appears to be upward. For those looking at other pairs, put options on USD/JPY could be attractive as the US-Japan interest rate differential narrows, with a potential target near the 146.00 support level.
Looking back at previous Fed easing cycles, like the one in 2019, the dollar often experiences a prolonged period of weakness once rate cuts are confirmed and underway. We believe a similar pattern is unfolding now, even if the initial moves are choppy. Any worsening in global risk sentiment could stall the dollar’s decline, but the primary trend appears set for the near future.
