Weekly Forex Analysis: US Dollar and Major Currencies Outlook

US Dollar Performance and Outlook

The US dollar experienced a notable decline early last week, hitting its lowest levels of the year against several G10 currencies in response to the Federal Open Market Committee’s (FOMC) rate cut announcement. However, the tone of Chair Powell’s press conference and the Summary of Economic Projections (SEP) turned out less dovish than the initial market reaction implied, especially compared to the concerns about labor market deterioration. Consequently, US Treasury yields rose, and the dollar rebounded, reaching new intraday highs heading into the weekend.

In the near term, there is room for moderate additional US dollar appreciation, though these gains should be viewed as corrective rather than directional. Given that much of the headline inflation impact from the PCE deflator has already been factored in through CPI and PPI data, combined with the diverse views among Fed officials, market attention is shifting from economic releases to the extensive slate of Fed speakers scheduled next week—14 out of 19 Fed officials, including Chair Powell on Tuesday, September 23.

The preliminary September Purchasing Managers Index (PMI) will carry more significance for European markets than for the US, Japan, or Australia. Meanwhile, the European Central Bank (ECB) appears unlikely to lower rates again soon. At the Bank of Japan (BOJ), two hawkish dissenters pushing against the decision to maintain the status quo boosted the market’s perceived chance of a rate hike this year to approximately 72%, marking the highest since late August. The recent uptick in Tokyo’s Consumer Price Index (CPI), the first in four months, may further open the door to tightening.

Key US Drivers

The dollar remains highly sensitive to developments in US interest rates. Market participants have fully priced in a rate cut next month and approximately a 75% probability of another cut in December, supported by these projections. However, with sentiment having swung sharply, a more rapid easing trajectory seems unlikely until after the October 3 jobs report.

Consistent with recent patterns, the market reacted differently to the Fed’s official statement compared to Chair Powell’s commentary. The coming week will feature extensive communication from nearly three-quarters of Fed governors and regional presidents, emphasizing the heterogeneity of views within the Central Bank.

Upcoming US Economic Data

The US releases a comprehensive suite of economic reports daily next week, with particular interest on two key dates. Thursday at 8:30 AM ET will see a host of data, including the advance goods trade balance—which is particularly relevant given the prevailing tariffs. Friday’s reports will focus on personal income, consumption, and price deflators. Should payroll growth prove overstated, this may imply that income figures have also been inflated, which would impact consumption trends. In the first half of 2025, personal income expanded by an average of 0.4% per month, consistent with 2024’s halves, while personal consumption has weakened, remaining flat in H1 2025 after modest gains in previous periods.

Technical Outlook

The Dollar Index managed a marginal gain last week, ending a two-week decline. Immediate resistance lies between 97.90 and 98.00, with a break above 98.25 expected to trigger a move toward 98.70. Momentum indicators are signaling a potential upward turn. Conversely, a drop below 97.00 would challenge this constructive near-term outlook.

—

Eurozone Developments

The US dollar remains the dominant influence on the euro. Despite political instability—marked by France appointing its fifth prime minister in two years—and recent NATO interventions against Russian drone incursions over Poland, the euro reached new multi-year highs. Remarks by Putin and Trump, characterizing the drone violations as innocent mistakes, did not sway market sentiment, even as Warsaw expressed strong disagreement. Allied air protection for Poland increased, with British and French jets deployed, and Estonia also experienced airspace violations.

With markets pricing in nearly 50 basis points of US Fed rate cuts in Q4, further shifts in sentiment may require new catalysts. The yield premium on US two-year Treasuries over German bunds narrowed to roughly 150 basis points, down 50 basis points since late July, and seems to have stabilized, which could potentially support corrective US dollar strength.

Eurozone Data and Technicals

Tuesday features the preliminary PMI, while Thursday will release money supply and lending figures. The ECB has signaled that another rate cut would require substantial justification, lessening the immediate market impact of these reports.

Following the FOMC press conference, the euro reversed from a four-year high near $1.1920, slipping to approximately $1.1730 by week’s end. A decisive break below the $1.1720–$1.1725 zone may lead to further declines targeting $1.1650–$1.1660. Technical momentum indicators are beginning to decline.

—

China and the Yuan

The People’s Bank of China (PBOC) has been gradually allowing the yuan to appreciate against the US dollar. The underlying motivations remain speculative; one theory suggests this may be a strategic concession aimed at facilitating a potential Trump-Xi summit later this year. However, China’s trade adjustments—shifting sourcing away from US energy and soy amid ongoing tariffs—demonstrate resilience rather than vulnerability.

Beijing continues to circumvent US export controls and maintains dominance in the rare earths supply chain, even as Washington reduces support to Taiwan and explicitly supports the yuan’s ~2.5% gain against the dollar in 2025, framing exchange rate tensions primarily as a European issue.

Chinese Monetary Policy and Data

No reductions in the loan prime rates (currently 3.00% for one-year and 3.50% for five-year) are anticipated this week, following a modest cut in May. Industrial profits for August will be reported next weekend, but early signs of China’s campaign against over-investment are unlikely. Over-investment appears rational given ample patient bank capital and incentives from local governments.

Yuan Technicals

The offshore yuan reached a yearly low against the dollar near CNH7.1850 midweek before recovering to around CNH7.12 by the weekend. A break above CNH7.1270 could open the path toward CNH7.15.

—

Japan’s Currency and Policy Landscape

The Japanese yen continues to track US interest rate movements more closely than domestic monetary policy or interest rate differentials. Key events include the US September employment report on October 3 and the Liberal Democratic Party leadership election on October 4.

Japanese Economic Indicators

The Japanese market generally shows muted reaction to PMI data; nonetheless, composite PMI readings improved steadily through August, reaching 52.0—the highest since last August. Tokyo’s CPI, released several weeks ahead of national figures, is a more influential barometer. The headline CPI has declined for three straight months, falling from a peak of 3.4% earlier in the year to 2.6% in August. The core inflation rate, excluding fresh food, also declined to 2.5% but is expected to show a slight increase in September.

The two hawkish dissents at the recent BOJ meeting have bolstered speculation around a possible rate hike in Q4.

Yen Technicals

Following the FOMC announcement and accompanying US rate drop, the dollar plunged to a two-month low near JPY145.50, representing roughly a 50% retracement from its rally since the April low around JPY139.90. The greenback subsequently rallied to stall near JPY148.25–148.30, close to the downtrend line from recent highs. The next resistance target is between JPY148.65–148.85, contingent on further US rate increases.

—

United Kingdom Currency Trends and Data

The dollar’s broader trajectory, particularly against the euro, exerts more influence over sterling than domestic UK events. However, long-term UK yields impact sterling inversely; rising 10- and 30-year yields typically coincide with declines in the pound.

UK Data Summary

The week ahead features a light economic calendar, with the preliminary September PMI as the primary data point. The composite PMI stood at 53.5 in August, the highest level since last year. A larger-than-expected budget deficit reported recently raises fiscal concerns ahead of Chancellor Rees’s Autumn Budget slated for late November.

Sterling Price Action

Sterling’s rally since early September peaked near $1.3725 last week but reversed sharply following the FOMC, settling just below $1.3465 by the weekend. Momentum indicators are turning negative, implying the potential for further declines. Near-term support lies between $1.3430 and $1.3435, with a breach possibly signaling a retest of the $1.3335–$1.3365 zone.

—

Canadian Dollar Dynamics

The US dollar’s overall trend remains the primary driver for the Canadian dollar, though CAD also showed independent weakness earlier in the summer. The greenback reached its low against CAD on June 16, ahead of other major currencies, and the Canadian dollar weakened by approximately 1.2% over the ensuing three months. However, renewed US dollar strength late last week propelled CAD to become the best performing G10 currency for the week, gaining about 0.5%.

Canadian Economic Data

Friday will release July GDP figures. Canada’s monthly GDP contracted each month in Q2, leading to an annualized quarterly contraction of 1.6%, which influenced the Bank of Canada’s recent rate cut. Market pricing reflects about a 55% chance of a rate hike next month and an 88% likelihood of tightening by December.

Technical Outlook for CAD

Short-term momentum traders appeared caught off guard initially, prompting a reversal that saw CAD regain ground ahead of the weekend. The US dollar attempted to push to CAD1.3825 but reversed to near CAD1.3765. Breaking below this level could send the dollar back toward its prior lows near CAD1.3725, which represents a neckline of a potential topping pattern projecting toward the annual low near CAD1.3540.

—

Australian Dollar Analysis

Although the Australian dollar and Canadian dollar diverged in September, the 30-day rolling correlation between them remains robust near 0.70—the lowest in about two months. The 30-day inverse correlation between the Australian dollar and the US dollar against the offshore yuan has weakened from -0.80 in early August to approximately -0.40.

Australian Economic Indicators

The Australian PMI generally has limited market impact; however, August’s composite reading surged to 55.5, the highest in at least three years, with new orders at multi-year highs. The August CPI release midweek is more consequential, following a rebound in July to 2.8% year-over-year from lows earlier in the summer. These inflation dynamics contribute to the market scaling back expectations for monetary easing, with the year-end target rate near 3.30%, the highest in nearly four months.

AUD Price Dynamics

The Australian dollar posted a key reversal following the FOMC announcement: after reaching a new yearly high slightly above $0.6705, the currency retreated sharply during Chair Powell’s press conference, settling below the previous day’s low. Further selling brought AUD down to roughly $0.6585 entering the weekend, overshooting the 50% retracement of the rally from September 2’s low near $0.6485. Near-term support targets include $0.6560–$0.6575 and then $0.6500–$0.6525. Momentum indicators are weakening, reinforcing a corrective outlook.

—

Mexican Peso and LatAm Currency Developments

Latin American currencies, including the Mexican peso, remain attractive due to relatively high interest rates, supporting carry trade demand. Mexico’s plan to increase tariffs on trade partners lacking free trade agreements (notably China, East Asia, and Russia) is intended to protect domestic jobs, according to President Sheinbaum, while also aiding negotiations with the United States. Concurrently, Mexico and Canada are pursuing closer economic ties.

Mexican Data and Monetary Policy

Mexico will release CPI data for the first half of September on Wednesday. Unless there is a significant deviation, the central bank is expected to lower its policy rate by 25 basis points to 7.50%, reflecting economic growth concerns and support from the peso’s strength. Market pricing anticipates a terminal rate near 7.0%, though actual cuts could be slightly more aggressive.

MXN Technical Landscape

The US dollar established a yearly low near MXN18.20 following the Fed announcement before rebounding to almost MXN18.35 on the same day. Subsequent dollar buying pushed the pair toward MXN18.47 before the weekend. A decisive break above MXN18.50–18.51 would signal a bottom formation and open the potential for gains toward MXN18.56–18.60. Price action indicates caution ahead of the upcoming Banxico policy meeting.

—

_This analysis provides an integrated overview of the recent movements and near-term outlooks for the US dollar and major world currencies, incorporating fundamental and technical factors across key economies._