Dollar's Uptrend Faces Uncertainty as Fed Outlook Shifts

The US dollar's recent uptrend remains intact, but softer Fed pricing and fading momentum suggest that its next directional move may depend on what we learn from the Federal Reserve over the coming days.

According to a correlation matrix, the relationship between the US dollar index and Fed rate expectations has strengthened in recent weeks. Specifically, the correlation coefficient rose to 0.88 last week, indicating that expectations for future interest rates are driving the broader dollar movement.

Fed funds futures have pared back their hawkish shift since June's FOMC meeting, with markets now pricing around 36.5 basis points of tightening by the June 2027 meeting, down from more than 50 basis points in late June.

Thursday's non-farm payrolls report reinforced this shift, showing a sharp drop in labour force participation and undershooting expectations for payrolls growth. The employment index may also be influential, as it could reinforce the view that payrolls are increasingly an outlier when assessing the US labour market's health.