The dollar index remained under pressure on Monday, holding negatively at 97.7 points, extending its recent weakness near levels not seen in months. This decline is attributed to a combination of market expectations regarding Federal Reserve policy, political pressures, and the potential impact of tariffs.
The Fed and Labor Market Signals
Investors are watching closely for a potential Fed rate cut at the upcoming meeting. As shown in the chart, speculation intensified after the latest nonfarm payrolls (NFP) reports signaled slowing job growth. July data showed a modest gain of 79,000 jobs, while August reinforced the slowdown with just 22,000 jobs added and unemployment rising to 4.3%.
Fed Chair Jerome Powell emphasized the labor market’s importance in policy decisions. This has driven expectations for a rate cut at the September 16–17 meeting, with cumulative cuts projected to total around 151 basis points by the end of 2026. Although the Fed left rates unchanged in July, Powell indicated restrictive policy may still be warranted but left the door open for cuts should labor market weakness persist.
Analysis of the US Labor Market
The chart highlights trends in key indicators—nonfarm payrolls, unemployment rate, and average hourly earnings versus the Fed funds rate. It shows job growth slowing sharply in recent months, while unemployment has inched higher. These signals point to a weakening labor market, potentially pushing the Fed toward monetary easing.
Divisions Within the Fed
Fed officials broadly agree on the likelihood of cuts but remain divided on the path ahead. Christopher Waller supported a September cut, citing labor weakness, while Raphael Bostic, despite favoring a cut this year, stressed inflation remains the key risk. Neel Kashkari acknowledged the growing complexity of policy calibration, while Charles Evans expressed doubts due to tariff effects.
Political Pressures and Tariff Risks
Fed independence faces mounting challenges from political pressure. Public criticism and the appointment of allies to key roles may push the central bank to be more responsive to administration demands, raising the risk of faster-than-expected cuts.
Tariffs add another layer of uncertainty. While politically appealing in the short term, their long-run effect could be higher consumer costs and slower economic growth. A weaker dollar may boost exports, but reshoring manufacturing is a complex, costly process not easily solved through tariffs alone.
Technical Outlook and Future Prospects
From a technical standpoint, the dollar remains in a fragile position. As illustrated in the chart, the DXY index trades below its 55-, 100-, and 200-day simple moving averages, reinforcing the broader bearish bias. A break below 96.37 (the 2025 low) could open the way toward support at 95.13 and 94.62.
On the upside, resistance lies at 100.26, followed by 100.54 and 101.97. Momentum indicators also reflect weak upward potential, with the 14-day RSI at 46.90 and ADX (14) at 10.34, signaling a weak trend.
What’s Next for the Market?
In the coming days, attention will turn to key US inflation data, including the Consumer Price Index (CPI), Producer Price Index (PPI), and weekly jobless claims. These reports will provide more clarity on the Fed’s policy trajectory.
The dollar’s current weakness stems from an interplay of economic and political forces. While consensus points to continued downside, the high volume of open short positions may limit the extent of further declines.
