Limited Movement by the Dollar After Inflation Meets Expectations

The US dollar remained stable after August inflation largely met expectations; however, significantly weaker US job market data, including a much lower August NFP and a 911,000 downward revision to past job growth, has solidified market expectations for a Federal Reserve rate cut on September 17th. Participants now anticipate three Fed cuts by year-end with an 80% probability, a dramatic shift that has already propelled gold to a new all-time high of $3,645 and suggests potential further dollar weakness, despite inflation remaining above target.

Analysis

The US dollar is holding stable post-September 11th inflation data, which met market expectations with a 2.9% annual headline rate. However, the dominant market driver is a significant deterioration in the US labor market, which has solidified expectations for imminent and sustained Federal Reserve easing. The August Non-Farm Payrolls report was exceptionally weak, showing only 22,000 new jobs against a 75,000 consensus, compounded by an unprecedented downward revision of 911,000 jobs for the 12 months to March 2025. This has led to a dramatic shift in monetary policy outlook, with CME FedWatch data indicating an 80% probability of three rate cuts by year-end, starting with the September 17th meeting. Consequently, gold (XAUUSD) has surged to a new all-time high around $3,645, reflecting the inverse correlation with falling real rates. In contrast, the EURUSD pair remains subdued, as the European Central Bank may have concluded its easing cycle, suggesting the interest rate differential will persist. While inflation remains above the Fed's target, the market is prioritizing the weak employment data, creating a clear fundamental tailwind for gold and a bearish outlook for the dollar pending the Fed's actions.

Key Decisions for Investors

• Given the high probability of multiple Fed rate cuts and a weakening labor market, investors should consider positioning for further US dollar weakness, especially against currencies with less dovish central banks.
• The strong fundamental support for gold from expected monetary easing suggests maintaining or initiating long positions in XAUUSD, using the 50 SMA around $3,500 as a key level to monitor for support during potential volatility around the Fed meeting.
• Monitor the September 17th Federal Reserve announcement closely, as market pricing for three cuts is aggressive and any less dovish guidance could trigger a sharp reversal in current gold and dollar trends.
• With EURUSD lacking clear direction and technical signals, it may be prudent to remain on the sidelines for this pair until a definitive catalyst emerges post-Fed meeting.