Softer US Data Raises Odds of Fed Rate Cuts, Pressuring the Dollar
Softer-than-expected US economic indicators have shifted market pricing toward a higher probability of Federal Reserve rate cuts in 2025, putting downward pressure on the US dollar. Key datapoints: nonfarm payroll growth slowed to its weakest pace since 2023, core CPI rose 0.2% month-over-month, retail sales increased just 0.1%, and the ISM manufacturing index contracted for a third month. The dollar index (DXY) fell roughly 2.3% after the latest employment report — its largest weekly drop in 2025. Futures-based pricing (CME FedWatch) now shows a 68% chance of at least one cut by September 2025 (up from 42% a month earlier), with probabilities rising for November and December. US Treasury yields have declined, notably in the 2–5 year sector, while equities show mixed reactions: growth stocks benefit, banks face margin pressure. Global effects include potential appreciation of emerging-market currencies, commodity demand support (including gold), and policy spillovers for other central banks. Risks that could reverse the outlook include a rebound in energy prices, stronger-than-expected inflation or employment data, geopolitical shocks, or fiscal shifts. Traders should monitor upcoming inflation and jobs reports, DXY support near 103.50 and resistance near 105.80, and market-priced Fed probabilities to gauge short-term volatility and directional bias.
Bearish
Softer US growth and inflation readings have materially increased market odds of Fed rate cuts in 2025, which typically weigh on the US dollar. The DXY’s 2.3% drop and sharply higher probabilities for cuts (68% by September) indicate markets are already pricing easing. For crypto traders, a weaker dollar and lower real yields historically support risk assets, including major cryptocurrencies, by improving dollar liquidity and reducing opportunity costs of holding non-yielding assets. Short-term, expect elevated volatility around upcoming CPI and payroll releases and potential rallies in crypto on dovish surprises. Medium-term, sustained rate cuts and lower yields could be bullish for crypto price appreciation, especially if macro flows into risk assets continue. Offsetting risks: a sudden inflation rebound, geopolitical shocks, or a rapid shift in Fed messaging could reverse dollar weakness and trigger crypto sell-offs. Historical parallels include late-2019 easing episodes where risk assets outperformed after Fed pivot, but current inflation is higher now, so outcomes may differ. Traders should watch DXY technical levels (support ~103.50, resistance ~105.80), Treasury yields, and Fed futures to time entries and manage risk.