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The dollar’s slump mirrors last year’s payrolls-driven false signals, raising the risk of another recalibration in Fed cut pricing if unemployment fails to rise.
- Markets, Fed risk repeating 2024 payrolls misread
- Over 100bp of cuts priced through 2026
- Wider data suggest labour market stability
- Fed independence fears look overstated
- DXY technicals hint at near-term bottom
Summary
The U.S. dollar’s latest slide may prove short-lived, echoing the false signals from payrolls that tripped markets last year. With broader data still pointing to resilience and Fed independence fears looking overstated for the moment, the stage may be set for another recalibration in rate-cut expectations that gives the greenback fresh support.
Dollar déjà vu?
The US Dollar Index bottomed during this period in 2024, rallying 10% over the next few months on a significant recalibration in market pricing for Fed rate cuts over the next year. Weakness seen in summer payrolls reports ended up delivering one almighty false signal on what was coming for the labour market. I can’t help but think we may be on the cusp of a repeat for the dollar in 2025.
Source: TradingView
Sure, there are obvious differences such as concerns about Fed independence that didn’t exist 12 months ago, and we have no presidential election to navigate on this occasion, but the backdrop otherwise is not overly dissimilar. A year ago, markets were pricing nearly 250 basis points worth of cuts in the year to September 2025—we got 125, with labour market conditions continuing to hold up against expectations for them to roll over.
Beware False Summer Payrolls Signal
Fast forward to today and we have over 100 basis points of cuts priced out to September 2026, not including the cut this week. Again, pricing is underpinned by concern that the low-hiring, low-firing environment will lead to higher unemployment.
Source: TradingView
That may well be the case, but if you did not have access to the payrolls report but every other piece of economic data currently available, would it scream a need for significantly lower rates? Maybe in the housing sector, but where else? Just look at this week: retail sales—flying. Jobless claims—multi-year lows.
Each to their own, but we, and of course the Fed, seem to be putting a lot of weight on a jobs report that has delivered nothing but a raft of false signals for years. A more than 1.7 million downward revision over the past two years, on top of the already significant downward revisions in the monthly data, should ram home the point that it cannot be trusted. What has been consistent is the unemployment rate and claims data, and they are providing a very different message. Stability, not a seizing up of the labour market.
Source: TradingView
Just like 12 months ago, if the payrolls slowdown does not translate to higher unemployment, it may require another sizeable market recalibration of the scale of rate cuts we’ll see, especially with inflation moving further away from 2%. Full employment would make it difficult for the Fed to dismiss the tariff impact on goods prices as temporary given it would risk fuelling higher wage demands.
The Question of Fed Independence
Of course, it’s not just concerns about the labour market that have contributed to the recent increase in rate cut pricing, but also unease about an erosion of Fed independence from the Government. Beyond the torrent of abuse via social media that characterised Donald Trump’s first term as president, the push for lower rates has been far more tactical in his second term, with the manoeuvring to appoint committee members aligned with the president’s wishes understandably leading to the belief interest rates may be significantly lower than what would otherwise be the case.
I get the concerns. The risk is there. But if the signs this week were anything to go by, the most acute of the left-tail risks from a loss of Fed independence may be avoided, meaning policy won’t be automatically set ultra-stimulatory to ensure the economy runs hot. Yes, newly appointed governor Stephen Miran dissented in favour of a 50-basis-point cut and was likely the FOMC member who indicated a need for 150 basis points worth of cuts over the remainder of this year, but he was a significant outlier.
Importantly, other Trump-appointed governors—Christopher Waller and Michelle Bowman—voted in line with the rest of the committee for a 25-point cut, avoiding a scenario where three policymakers dissented along political lines for a larger decline in rates. Granted, it’s only one meeting, but at the margin it should lessen concerns that policy in the future will be set based on factors other than economic conditions.
Even if Miran is appointed as the next Fed chair, unless he can convince the rest of the committee to follow his lead, it may prove difficult to engineer sharply lower interest rates. Even with his low-ball year-end forecasts for the funds rate, it’s telling there was only one additional rate cut added to the median Fed funds profile this week relative to what was forecast three months ago. If markets were looking for evidence of a significant erosion of Fed independence, it was lacking at this meeting.
Fuel in Place for Dollar Rebound?
For the U.S. dollar, combined with evidence of continued economic resilience excluding the signal from the payrolls report, it must create some doubt on whether the downtrend seen since the turbulence of the Liberation Day tariff will extend far beyond what’s been seen.
From a technical perspective, recent price action suggests the U.S. dollar index may have put in a near-term bottom. The chart below shows the DXY daily and weekly charts on the left and right respectively.
Source: TradingView
On the daily, Wednesday’s piercing pattern following the Fed meeting is a known reversal pattern, gapping on the open to set new lows before reversing hard over the remainder of the session. Follow-up buying on Thursday solidifies the signal with the price now bumping up against minor downtrend resistance. Momentum indicators are also showing signs of turning, with RSI (14) breaking its downtrend and pushing back towards neutral levels. MACD is yet to confirm, although the shift back towards the signal line suggests, at the very least, downside pressure is easing.
While it comes with the caveat that Friday is just getting underway, as things currently stand the weekly hammer candle is also a known reversal pattern. As seen previously, other patterns on the DXY weekly—both bullish and bearish—often provide reliable signals on what’s to come.
Though few trade directly in DXY, the signal can be used for those assessing setups in other pairs, especially EUR/USD and USD/JPY as they carry the largest weighting in the DXY by some margin.