Markets Brace as Fed Rate Cut Bets Drive Dollar, Commodities, and FX Moves

Global markets opened the week on a cautious note as expectations of a Federal Reserve interest rate cut weighed on the US Dollar, while diverging central bank policies and mixed economic data influenced major currencies, commodities, and oil. Investors are closely monitoring inflation trends, trade developments, and key economic releases for direction.

US Dollar Steady Amid Fed Rate Cut Speculation and Trade Policy Developments

The US Dollar Index (DXY) is holding steady around 97.70 during Monday’s Asian session after four consecutive days of losses, as US markets remain closed for the Labor Day holiday. The Greenback faces pressure amid growing expectations of a Federal Reserve interest rate cut at the September meeting, following comments from San Francisco Fed President Mary Daly, who indicated policymakers are prepared to act soon and that inflation driven by tariffs is likely temporary. Economic data showed the US PCE Price Index held steady at 2.6% year-over-year in July, while the core PCE rose 2.9%, both matching forecasts. Meanwhile, trade policy remains in focus after the US Court of Appeals ruled that tariffs imposed by former President Donald Trump were illegal; despite the ruling, US Trade Representative Jamieson Greer stated that the administration intends to continue trade negotiations.

 EUR/USD Strengthens Amid Dovish Fed Signals and ECB Caution

EUR/USD extended its winning streak to a fifth consecutive session, trading around 1.1700 during Monday’s Asian hours, supported by broad US Dollar weakness as expectations for a Federal Reserve interest rate cut in September grow. Dovish remarks from Fed officials, including San Francisco Fed President Mary Daly—who suggested policymakers are prepared to cut rates soon and that tariff-driven inflation is likely temporary—and Fed Governor Christopher Waller, who expressed openness to a larger cut if labor market conditions deteriorate, have weighed on the Greenback. This comes despite Friday’s data showing the US core PCE Price Index rose 2.9% year-over-year in July, in line with expectations and slightly above June’s 2.8%. Meanwhile, the European Central Bank (ECB) remains cautious, with Governing Council member Olli Rehn emphasizing the need for flexibility amid uncertain inflation trends, citing downside risks from a stronger Euro, cheaper energy, and global trade policy effects. As US markets remain closed for the Labor Day holiday, the combination of rising Fed rate cut bets and ECB’s data-dependent stance is providing near-term support for the Euro.

GBP/USD Holds Firm Above 1.3500 Amid Diverging Central Bank Outlooks

GBP/USD starts the week on a firm footing, trading steadily above the key 1.3500 psychological level during Monday’s Asian session, supported by a favorable fundamental backdrop that suggests the path of least resistance remains to the upside. The British Pound continues to benefit from the Bank of England’s (BoE) cautious approach to rate cuts, which stands in contrast to growing expectations that the Federal Reserve will lower interest rates at least twice by year-end—a divergence that has fueled the Pound’s relative strength against the US Dollar. However, a modest uptick in the USD could pose some resistance, as traders remain cautious ahead of key US macroeconomic releases this week. With US markets closed for Labor Day, attention now shifts to the final UK Manufacturing PMI for immediate direction, while the spotlight later in the week will fall on Friday’s Nonfarm Payrolls (NFP) report, which is expected to be a major catalyst for USD movement and the next leg in the GBP/USD trajectory.

USD/JPY Rises Amid Cooling Japan Inflation and Fed Rate Cut Speculation

USD/JPY edged higher to around 147.20 during Monday’s early Asian session, as the Japanese Yen softened on the back of easing inflationary pressures, which have dampened expectations for another Bank of Japan (BoJ) rate hike this year. August’s Tokyo Consumer Price Index (CPI) showed a year-over-year increase of 2.5%, down from July’s 2.9%, while core CPI excluding fresh food also slowed to 2.5%, in line with forecasts—signs that inflation may be cooling. This has prompted markets to dial back BoJ tightening bets, weighing on the JPY. On the US side, the Dollar remains in a mixed state after the PCE inflation data on Friday showed price growth holding steady in July but still above the Fed’s 2% target. While this reinforces expectations of a Fed rate cut in September, it could limit further USD gains against the JPY. Market focus now turns to the US ISM Manufacturing PMI due Tuesday, followed by the closely-watched Nonfarm Payrolls (NFP) report on Friday, with forecasts pointing to 78,000 new jobs and a rise in the unemployment rate to 4.3%, both key indicators for shaping the Fed’s policy path and influencing USD/JPY direction.

AUD/USD Steady Near 0.6540 as RBA-Fed Divergence Supports Aussie

AUD/USD is holding firm around 0.6540 during Monday’s Asian session, consolidating after a four-day rally, as the US Dollar remains under pressure from rising expectations of a Federal Reserve (Fed) rate cut in September. Dovish commentary from Fed officials—San Francisco Fed President Mary Daly and Governor Christopher Waller—has increased speculation of imminent rate cuts, especially following steady US PCE inflation data and growing labor market concerns. Despite softer Australian building permits data, which fell 8.2% MoM in July (more than expected), the Aussie has found support from stronger-than-expected domestic inflation, with July’s CPI rising 2.8% YoY, reducing the likelihood of Reserve Bank of Australia (RBA) easing in the near term.

Meanwhile, mixed signals from China—Australia’s key trading partner—added a layer of complexity. The Caixin Manufacturing PMI rose to 50.5 in August, signaling renewed growth, while the official NBS Manufacturing PMI remained in contraction at 49.4. However, the Non-Manufacturing PMI improved to 50.3, reflecting some resilience in the services sector. Technically, AUD/USD maintains a bullish structure, trading above the nine-day EMA and an ascending trendline. Resistance lies at 0.6568 (August high), with a potential push toward the nine-month high of 0.6625. Support is seen at 0.6511 and the key 0.6500 level, with a break potentially exposing the 0.6414 low from August 21. Traders now look to US ISM PMI data on Tuesday and Friday’s NFP report for the next directional cues.

WTI Crude Slips to $63.50 Amid Supply Concerns and Geopolitical Risks

West Texas Intermediate (WTI) crude oil extended its losses into a second consecutive session on Monday, trading near $63.50 per barrel during Asian hours, pressured by growing concerns of oversupply and weakening global demand. Market sentiment remains cautious ahead of the upcoming OPEC+ meeting later this week, where the prospect of accelerated output increases is fueling bearish expectations—although much of the additional supply has yet to impact the US market, which is already experiencing lower seasonal demand following the end of the summer driving season.

Despite bearish fundamentals, downside pressure on oil prices is being cushioned by elevated geopolitical risk premiums. Tensions remain high due to the ongoing Russia-Ukraine conflict, with Ukrainian President Volodymyr Zelenskiy vowing to intensify strikes deep inside Russia in retaliation for drone attacks on Ukraine's energy infrastructure. These escalations, particularly those affecting oil transport and production infrastructure, are raising concerns over potential supply disruptions.

Additionally, markets are watching whether India will comply with US pressure to reduce Russian oil imports after Washington imposed secondary sanctions on New Delhi last week. Attention is also on the upcoming Shanghai Cooperation Organization (SCO) summit, where key geopolitical figures—China's Xi Jinping, Russia's Vladimir Putin, and India's Narendra Modi—are expected to discuss energy and trade issues.

Gold Rebounds to 5-Month High on Firm Fed Rate Cut Expectations

Gold (XAU/USD) resumed its upward momentum during Monday’s Asian session, rallying to a fresh five-month high near $3,470 as dovish US Federal Reserve (Fed) expectations reignited demand for the precious metal. After briefly pulling back on profit-taking, gold regained traction amid growing market confidence that the Fed will cut interest rates at its September policy meeting. This renewed optimism was fueled by US inflation data, particularly the core PCE Price Index, which—despite remaining above the Fed's 2% target in July—failed to derail rate cut hopes.

While stronger-than-expected US economic data last week, including a Q2 GDP growth revision to 3.3% (versus the prior 3.0% estimate), and better-than-forecast Initial Jobless Claims initially supported the US Dollar and pressured gold, those gains were short-lived. The CME Fed Watch tool now shows traders pricing in an 89% chance of a 25 basis point cut this month, up from 85% before the PCE data. Lower interest rates reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive in a low-rate environment. Analysts, including High Ridge Futures' David Meger, note that expectations for one or even two Fed rate cuts this year are broadly supportive of commodities, especially precious metals like gold and silver.

With US markets closed for Labor Day and key economic reports looming later this week, market participants remain attentive to Fed policy signals, central bank divergences, and geopolitical risks. These factors are likely to continue shaping currency movements, gold demand, and crude oil prices in the near term.

The weekly market update is published every Monday. If missed due to unforeseen circumstances, it will be posted the following day.

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