The U.S. dollar index (USDIDX) has erased its gains from the start of the Asian session (currently: +0.05%), signaling persistent downward pressure after Fed Chair Jerome Powell’s dovish speech on Friday in Jackson Hole (at the time: -1%). On the other hand, the money market has tempered its enthusiasm, slightly scaling back expectations for U.S. rate cuts.
A brief breakout of the USDIDX above the 10- and 30-period EMAs (yellow and light purple) was cut short following Powell’s remarks last Friday, which suggested a return to U.S. rate cuts. Gains halted at the 38.2% Fibonacci retracement level, before reversing toward the 78.6% level, serving as a key support. Source: xStation5
What is moving the USDIDX today?
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During his Jackson Hole speech, Jerome Powell opened the door to a U.S. rate cut, highlighting shifts in the balance of risks for monetary policy. According to Powell, the risk of a weaker labor market is rising, as indicated by recent employment data (NFP), particularly the large downward revisions of recent months. The main risk factor is the slowing pace of hiring and longer job search times, which in the event of a slowdown could easily turn into higher unemployment.
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U.S. Treasury yields are edging higher: 2-year up 1bp to 3.71%, and 10-year up 2bp to 4.27%. The correction is modest compared with Friday’s sharp drop in the rate-sensitive 2Y's (-10bp at the time), though that market reaction seems somewhat exaggerated given the range of possible outcomes at the next FOMC meeting.
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Cooling expectations are also visible in the money market. Interest rate swaps reduced the implied probability of a September 25bp cut to 85% (down from around 90% on Friday), while the FOMC’s decision will depend on a series of data (PCE, NFP) to be released before September 16–17. Even if the core PCE inflation print (consensus: 2.9% y/y), the Fed’s preferred gauge, does not come in hotter than expected, a September cut could still carry a hawkish tone. In other words, a one-off 25bp cut would serve as insurance against rising labor market risks, but it would not necessarily signal the start of a broader easing cycle in 2025.
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