The US dollar is ending the month lower after a volatile week. It initially gained momentum following Powell’s dovish comments but ended the week on a downturn, possibly influenced by market selloffs and month-end activities.
The focus is now on September with key events on the horizon such as the NFP and CPI reports, alongside the FOMC meeting. Markets are predicting a rate cut with an 89% probability, and the year’s total pricing suggests two rate cuts at 55 basis points.
Shift In Market Focus
Recent softer NFP figures and negative revisions have shifted the market’s attention to the labour market over inflation. This shift anticipates the Fed viewing recent inflation rises as temporary, which might influence dovish expectations and market positioning.
Strong upcoming data could reduce the probability of a September rate cut, whereas weaker data could reinforce expectations for additional cuts, which could further pressure the dollar. The state of the Fed’s independence might also have a lasting impact on the dollar’s performance.
Technically, the US dollar is trading within a rising channel; a bounce in July following strong NFP data saw it range for more monetary policy clarity. On the daily chart, a rally emerged after breaking a downward trendline, but it was negated by soft NFP data.
September is shaping up to be a pivotal month, and we are positioned for a weaker US dollar. The market is pricing in an 89% probability of a Federal Reserve rate cut at the next meeting. This is largely because recent economic data has shown a cooling labor market, which the Fed is watching closely.
Crucial Upcoming Data
The last Non-Farm Payrolls report, released in early August 2025, showed a gain of just 145,000 jobs, falling short of expectations and featuring negative revisions to prior months. Meanwhile, the recent PCE inflation data came in at 2.8%, right in line with forecasts, reinforcing the idea that the Fed is more concerned with employment than prices right now. This is why upcoming labor data will be so crucial for the dollar’s direction.
Next week’s ADP employment and ISM PMI reports will be the first major tests for this dovish outlook. We see these as key opportunities to gauge market sentiment before the official NFP and CPI reports later in the month. Soft figures here will likely strengthen bets on more aggressive rate cuts, potentially pricing in a third cut by year-end and pushing the dollar lower.
For us in the derivatives market, this means implied volatility on USD currency pairs is expected to climb heading into these data releases. A long volatility strategy, such as buying a straddle on the EUR/USD, could be effective to capture a large price swing regardless of the data’s direction. Conversely, a strong data print would cause a sharp reversal, squeezing traders already heavily positioned for dollar weakness.
This market setup feels very similar to what we witnessed in late 2023, when investors aggressively priced in rate cuts for 2024, leading to a significant dollar sell-off through the end of the year. The risk now, as it was then, is that the data doesn’t cooperate and forces a rapid unwinding of these dovish bets. Therefore, any directional positions should be managed with tight risk parameters.
Technically, the dollar index is at a critical juncture, trading within a long-term rising channel. A decisive break below the lower boundary of this channel would validate the bearish thesis and could open the door for a slide towards the 90.00 level. We will be watching this technical level closely as a confirmation signal for extending bearish positions.
