US Dollar: Powell’s Dovish Tone Keeps Greenback Vulnerable Ahead of Key Data

• Powell’s dovish tone keeps short-term pressure on the US dollar, boosting risk appetite.
• Key data including PCE, GDP and jobs will decide the US dollar’s next direction.
• Below 97.50 accelerates selling; above 98.50 confirms recovery, driven by macro outcomes.
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At the end of last week, the US dollar dropped sharply after Fed Chair Jerome Powell hinted at a possible rate cut during his Jackson Hole speech. By stressing the risks in the job market, Powell signaled that the Fed is now focusing more on protecting employment than fighting inflation.

This pushed market expectations for a 0.25% rate cut in September up to 85%, and the US Dollar Index (DXY) fell to its lowest level in four weeks. While the decline has paused at the start of this week, upcoming key economic data will likely decide the US dollar’s next move.

Fed’s Position: Dovish Tilt With a Data-Dependent Path

Powell’s comments suggest the Fed is done with raising rates and is moving toward starting a rate-cut cycle. Still, the speed of those cuts will depend on upcoming data. Fed officials remain split — some are still focused on inflation risks, while others are more concerned about slowing job growth. Overall, this points to a gradual path of easing rather than just a single rate cut in September.

This week, markets will be watching two key releases closely: core PCE inflation and GDP data.

• If PCE comes in lower than expected, it would give the Fed more room to cut rates, making a September move more likely and putting pressure on the US dollar.
• If weekly employment data shows a sharp slowdown, it would back Powell’s concerns about jobs and could trigger further US dollar selling.
• On the other hand, if the data is strong, markets may believe that while a September cut is possible, the Fed will hold back on making further cuts this year. That could help the US dollar recover its recent losses.

Adding to this, political pressure from the Trump administration on the Fed, along with trade policies, may inject more volatility into the US dollar. If markets see Fed independence at risk, investor sentiment could sour further.

Risk Appetite in Focus: Tracking US Dollar Trends

• Dovish Scenario (weak data, stronger rate-cut expectations): If the data is weak, the US dollar index could stay below 97. Risk appetite would rise, boosting developing country currencies and stock markets. The EUR/USD and GBP/USD could also keep gaining against the US dollar.
• Neutral Scenario (mixed data, limited rate cuts): If the data is mixed, the US dollar might recover recent losses and move back toward 98. Markets would see short-term swings, but overall risk appetite would remain intact.
• Hawkish Scenario (strong data, cautious Fed): If PCE and GDP are stronger than expected, markets may think the Fed will cut rates more slowly. The US dollar could strengthen sharply, risk appetite would fall, equities might face selling pressure, and emerging market assets could weaken.

Powell’s comments point to short-term pressure on the US dollar as markets price in a dovish Fed, but upcoming macro data will ultimately decide its longer-term direction.

US Dollar Technical Outlook

The US dollar index (DXY) dropped to 97.56 after Powell’s speech, its lowest level in four weeks, before edging back to around 97.85 as the new week begins.

On the downside, 97.50 is now a key support level. If daily closes fall below this, the index could quickly slide toward the 96.25–96.55 zone, especially if PCE data comes in weak.

On the upside, 98.5 is the first resistance. A break above this would open the door to 99.70, a more critical resistance area. But for that to happen, the market would need strong macro data that supports a “cautious Fed” outlook.

The US dollar’s short-term weak outlook, following Powell’s dovish tone, is still in place. If the index falls below 97.50, selling pressure could intensify; a move above 98.50 would confirm a short-term recovery. This makes upcoming macro data critical for deciding the next direction.

For now, dovish Fed rhetoric is keeping the US dollar under pressure, which is boosting risk appetite in markets. The euro and sterling have been the main beneficiaries of US dollar weakness in recent weeks, and this trend could continue if data stays weak.

Emerging market currencies may also get short-term support, but lasting gains are unlikely until the Fed’s rate-cut path becomes clearer. Among them, currencies with higher interest rate advantages could stand out more during periods of US dollar softness.

On the bond side, falling U.S. 10-year yields are helping support risk appetite. If yields keep dropping, stock markets could see broad-based buying. But if the US dollar rebounds on strong macro data, yields may rise again, leading to profit-taking in equities.

In short, the US dollar’s direction in the coming days will depend on the data, while investors will be asking how sustainable the current risk appetite really is. Weak data could keep risky assets in demand, while strong data may shift momentum back in favor of the US dollar.

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