US Dollar Forecast: EUR/USD Falls Amid U.S. Jobs Data and Fed Speculation

U.S. Dollar Holds Steady Ahead of CPI Report as Treasury Yields Climb

The U.S. dollar index (DXY) remained near a seven-week high on Monday as traders positioned themselves ahead of Thursday’s critical U.S. consumer price index (CPI) release. Friday’s robust U.S. jobs report, coupled with escalating geopolitical tensions in the Middle East, has helped the greenback sustain recent gains, keeping the index firmly supported by rising Treasury yields.

Dollar Strength on Robust Jobs Data and Global Tensions

The dollar index was nearly flat, up 0.05% at 102.60, after climbing to 102.69 last Friday—its highest level in seven weeks. The rally followed a stronger-than-expected U.S. jobs report for September, which saw nonfarm payrolls rise by 254,000, far surpassing the 150,000 forecast. Unemployment also dropped, with solid wage growth signaling a resilient U.S. economy. This data led traders to reassess their expectations for the Federal Reserve’s rate cuts, limiting the chances of a dovish policy shift.

In addition to the jobs data, escalating conflict in the Middle East has fueled safe-haven demand for the dollar. Israel’s continued military strikes against Hezbollah and Gaza, combined with tensions with Iran, have kept market risk elevated, further supporting the greenback. Francesco Pesole, a forex strategist at ING, noted that markets have largely abandoned expectations for a 50-basis-point cut from the Fed, and he sees no immediate catalyst for a structural weakening of the U.S. dollar.

Treasury Yields Surge Amid Strong Economic Data

U.S. Treasury yields have also surged, reinforcing the dollar’s strength. The 10-year Treasury yield reached 4.03%, its highest level since early August, while the 2-year yield climbed 7 basis points to 4.0%. Rising yields, spurred by strong labor market data, reflect traders’ reassessment of the Fed’s future rate decisions. The CME’s FedWatch tool now shows a 95% probability of a 25-basis-point rate cut in November, up from 47% last week. Some analysts, however, believe the robust employment data could even prompt the Fed to reconsider cutting rates at all.

Yen and Euro Weaken Against the Dollar

While the dollar remained stable, its strength continued to weigh on other major currencies. The euro was slightly down at $1.0970, facing additional pressure from fiscal concerns in Italy and France. Barclays’ strategist Lefteris Farmakis highlighted that fiscal reforms in these countries could marginally support the euro if successfully implemented. Meanwhile, the Japanese yen traded lower at 148.60 per dollar, its weakest in nearly two months, following expectations that Japan will delay rate hikes.

Market Forecast: Dollar Likely to Stay Bullish Ahead of CPI

With the U.S. labor market showing strength and Treasury yields climbing, the dollar is likely to maintain its bullish momentum in the short term. Traders will closely monitor Thursday’s CPI report for further clues on inflationary pressures and the Federal Reserve’s rate outlook. Should inflation remain elevated, the likelihood of deeper Fed rate cuts will diminish, keeping the U.S. dollar supported in the near future. Additionally, geopolitical tensions in the Middle East could sustain safe-haven demand for the dollar, reinforcing its position at recent highs.