The US Dollar (USD) is under strong downward pressure. This is because of a shift towards dovish sentiment in the Federal Reserve (Fed). Many people are now speculating about possible interest rate cuts soon.
This changing view is greatly affecting major currency pairs. Pushing USD/JPY lower and giving important support to EUR/USD. The next few days will be important. Key economic data and comments from Fed officials will help decide the pace and size of these changes.
Last Friday's US nonfarm payrolls report for July was weaker than expected. This has increased the negative feelings about the US Dollar. Markets are now aggressively pricing in the risk of more than 50 basis points of Fed rate cuts over the remainder of 2025.
Traders dealing with USD/JPY and EUR/USD are now focused on Tuesday’s US ISM non-manufacturing PMI report. They are also watching for comments from Federal Open Market Committee (FOMC) officials.
The recent drop in the Dollar was mainly because of a softer stance from Mary Daly, the San Francisco Fed President. A moderate voice in the FOMC, Daly said on Monday that "the time for rate cuts is nearing." He also hinted that the Fed "may need more than two" cuts this year.
She cited softening in the labour market and subdued inflation as key reasons for her stance. Comments from a well-known policymaker are crucial. They suggest a possible change in views among Fed officials. This also supports market hopes for easier monetary policy.
The aggressive pricing of Fed rate cuts for the rest of 2025 is clearly affecting G10 currency pairs. The analysis demonstrates a strong linking.
It connects the five-day correlation scores of US Dollar pairs with the 2025 Fed funds futures curve. The scores are +/-0.84 or higher for pairs like EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, and AUD/USD.
The market's pricing for Fed cuts and the US Dollar Index on a five-minute tick are remarkably similar. This shows a strong connection between the two. However, it's important to note that in the past month, this relationship has been weaker. This suggests that the trend may not last without new support.
If this strong correlation continues, analysts will closely watch Tuesday's August ISM non-manufacturing PMI report. Traders will pay close attention to new orders and price measures in this report. These parts are important for shaping expectations about growth and inflation in the largest sector of the US economy.
Beyond the data, any further remarks from Fed officials, even outside scheduled speeches, could trigger significant market reactions.
The mounting Fed rate cut bets have sent USD/JPY into a clear decline. The pair staged a dramatic bearish key reversal on Friday, extending its move lower on Monday.
This latest move has caused USD/JPY to drop below the support level at 147.00. It also broke its uptrend from the July lows. This could signal a change in risks if this break stays.
Momentum indicators have turned down, but the 14-day RSI and MACD are not showing strong bearish signals. This suggests a more neutral short-term view, which puts more focus on price action.
For Bears: If the bearish break holds, more shorts may enter. They will target the first support at 146.00, which is near the 50-day moving average. A break below this could expose 144.44 and then 142.42.
For Bulls: Should USD/JPY reverse higher and hold above 147.00, resistance levels at 147.95 and 149.00 could come into play.
Meanwhile, EUR/USD has shown interesting price movement for buyers. It stayed above 1.1558, the low from July 17, on Monday.
This maintains the validity of the bullish morning star pattern completed on Friday. However, the pair will likely need to clear its 50-day moving average soon to attract more buyers. With momentum indicators currently neutral, price action remains the primary guide.
For Bulls: If prices go up, buyers could aim for 1.1665 and 1.1720. The second target matches the March 27 uptrend after breaking the 50-day moving average.
For Bears: If EUR/USD fails to hold 1.1558, the setup could flip, allowing shorts to target support at 1.1450 or 1.1400.
Chart 1: USD/JPY Daily Chart shows a bearish breakdown.
Data source: TradingView
Chart 2: EUR/USD Daily Chart highlights a bullish morning star and the 50-day moving average.
Data source: TradingView
The current market environment demands heightened vigilance. The interplay of economic data, central bank commentary, and technical levels will determine the Dollar's next significant move.
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