What to Know

  • Softer U.S. economic data have reduced expectations for another Federal Reserve rate increase, putting fresh pressure on the dollar.
  • U.S. retail sales slipped in July for the first time in nine months, while recent CPI and PPI trends have reinforced the view that the Fed may hold rates steady.
  • Market-implied odds of a September rate hike have fallen to 30% from 50%, while expectations for no change stand at 70%.
  • Currency traders are watching the Fed's July meeting minutes for signals on how policymakers view slowing growth and inflation risks.
  • Expectations for tighter European Central Bank policy are supporting the euro, with 57 of 69 economists in a Reuters poll conducted August 10-13 expecting a 25-basis point increase to 2.50%.
  • Eurozone inflation rose to 2.9% in July, keeping attention on persistent price pressures and upcoming activity data.
  • UK second-quarter GDP growth quickened by 0.4%, while June growth was 0.3%, helping underpin sterling's domestic backdrop.
  • The U.S. Dollar Index has broken below its rising trendline and is testing the 99.38-99.42 support zone.
  • EUR/USD remains technically constructive above 1.1580, while GBP/USD is approaching major resistance around 1.3587.

Dollar Weakens as Fed Hike Expectations Recede

The U.S. dollar begins Wednesday, August 17, on the defensive as investors reassess the path for Federal Reserve policy following softer U.S. economic data. The shift in expectations has been meaningful for currency markets because the dollar's recent support has relied heavily on the possibility that the Fed could keep tightening if inflation risks remained stubborn. With incoming data pointing to a cooler demand backdrop, market participants are now questioning whether another rate increase is needed.

U.S. retail sales slipped in July for the first time in nine months, adding to concerns that household momentum may be fading. That weakness has arrived alongside worsening consumer sentiment and follows recent CPI and PPI trends that have encouraged traders to reduce bets on additional Fed tightening. The result has been a drop in the perceived likelihood of a September move, with rate hike odds falling to 30% from 50%. Markets now assign a 70% chance to no change, suggesting that the baseline expectation has shifted toward a policy pause.

For the dollar, the issue is not simply whether the Fed raises rates at the next meeting. The broader question is whether U.S. policy can remain relatively more hawkish than other major central banks. When U.S. data soften while inflation pressures abroad remain relevant, the policy gap can narrow. That is precisely the theme driving attention across EUR/USD, GBP/USD and other major dollar pairs.

Fed Minutes Take Center Stage for Currency Traders

The Fed's July meeting minutes are now a key event for the foreign exchange market. Traders will be looking for evidence of how policymakers balanced slowing growth against inflation risks and whether officials showed concern that tighter financial conditions are beginning to bite. If the minutes suggest that policymakers are more cautious about growth, the dollar could remain vulnerable. If they instead emphasize inflation risks and the need to keep policy restrictive, the currency may find short-term support.

Market participants are also sensitive to how the Fed frames the recent slowdown. A central bank that sees weaker retail activity as temporary may still keep a tightening bias in place. A central bank that views softer activity as confirmation that prior rate increases are working may be more comfortable holding rates at current levels. That distinction matters for bond yields, rate expectations and ultimately dollar demand.

Euro Supported by ECB Tightening Expectations

The euro is benefiting from a comparatively more favorable policy backdrop as markets assess the chance that the European Central Bank moves ahead with further tightening. A Reuters poll conducted August 10-13 showed that 57 of 69 economists expected a 25-basis point increase to 2.50%. That expectation is helping support EUR/USD at a time when U.S. rate hike bets are fading.

Eurozone inflation rose to 2.9% in July, highlighting persistent inflationary pressure. The conflict in the Middle East has also been cited as a factor keeping price risks in focus. While growth concerns have not disappeared, economists increased their outlook for growth from 2026 to 0.8%, leaving investors to weigh whether activity can hold up even as monetary policy remains tight.

Upcoming flash PMIs and confidence indices are therefore important for the euro's next move. Stronger activity signals could reinforce the case for the ECB to maintain a firm policy stance, while weaker data could challenge the market's confidence in further tightening. For now, however, the euro is being supported by the view that policy divergence with the United States is narrowing rather than widening.

Sterling Holds a Firmer Domestic Base

Sterling also has support from domestic data. UK second-quarter GDP growth quickened by 0.4%, while June growth came in at 0.3%. Reuters noted that UK growth in the first half of the year was the fastest among G7 economies, adding to the view that the pound has a relatively firm fundamental base.

Even with that backdrop, markets are still pricing roughly one bank rate increase for the UK this year, which places added importance on incoming inflation and labour market data. If inflation remains sticky or labour conditions continue to suggest resilience, traders may maintain expectations that the Bank of England has more work to do. If the data soften, sterling's support could become more dependent on technical momentum and dollar weakness.

The key macro theme across the dollar, euro and pound remains shrinking policy divergence. Softer U.S. data make the Fed less likely to hike again, while the ECB and BoE still carry tightening possibilities. That combination keeps EUR/USD, GBP/USD and USD/JPY in focus for currency traders navigating the next phase of the dollar cycle.

U.S. Dollar Index Technical Outlook

The U.S. Dollar Index is testing 99.41 on the daily chart after falling below the rising trendline that had defined the broader recovery from the spring lows. The break has weakened the technical structure and placed the index under pressure near a critical support region. Price is also below the 100.23 50-day EMA and the 99.90 100-day EMA, signaling that short-term and medium-term momentum have deteriorated.

The latest bearish candle has pushed DXY into the 99.38-99.42 support zone. This area is important because a clear break below it would expose 98.76 and then 98.18. On the upside, immediate resistance sits at 100.06, followed by 100.82 and 101.62. Until the index can reclaim the broken trendline and move back above the EMA cluster, technical traders are likely to treat rallies with caution.

Momentum indicators also point to a fragile setup. RSI is at 36, showing weak momentum and approaching oversold territory. That does not guarantee an immediate rebound, but it does suggest that sellers may need fresh catalysts to extend the move aggressively. A recovery above 100.06 would improve the near-term tone, while a decisive loss of 99.38 would deepen the bearish dollar outlook.

GBP/USD Technical Outlook

GBP/USD is trading around 1.3558 on the 2-hour chart and continues to move within a clear pattern of higher highs and higher lows. Price remains above the 50-EMA at 1.3514 and the 100-EMA at 1.3493, while a rising trendline continues to support the broader positive structure. Recent bullish candlesticks point to steady buying interest, though the move is approaching an important resistance area.

RSI is at 67, reflecting strong upward momentum and movement toward overbought territory. Immediate resistance is located at 1.3587, followed by 1.3627 and 1.3670. Support is seen at 1.3539, then 1.3475 and 1.3434. For bullish traders, the area above 1.3510 and 1.3539 remains important because holding that zone would keep the current structure intact.

A break above 1.3587 could open the door for a move toward 1.3627. However, if buyers lose the rising trendline, the constructive setup would become less convincing. In that case, the pound could shift from trend continuation to consolidation as traders reassess whether domestic strength and dollar weakness are enough to sustain the rally.

EUR/USD Technical Outlook

EUR/USD is trading at 1.1598 on the 4-hour chart after breaking above the recent consolidation zone and 1.1580. The pair is also above the 50-EMA at 1.1539 and the 100-EMA at 1.1512, showing that short-term momentum remains with buyers. The pair continues to trade above the trendline that has supported its recovery from July lows.

RSI is at 72, placing momentum in overbought territory. That condition could lead to short-term consolidation or a pullback, especially if traders take profit near resistance. Resistance is located at 1.1622, 1.1655 and 1.1686. Support sits at 1.1580, 1.1545 and 1.1515.

The structure remains bullish as long as EUR/USD holds above 1.1580. A clean break above 1.1622 could extend the move toward 1.1655. Conversely, a break below 1.1545 would challenge the validity of the latest breakout and could force traders to reconsider the strength of euro momentum.

Market Implications for the Dollar, Euro and Pound

The current foreign exchange setup is being shaped by a mix of macro expectations and technical pressure. The dollar is vulnerable because U.S. data have softened enough to reduce the urgency for another Fed hike. The euro is supported by expectations that the ECB may continue tightening. The pound is underpinned by stronger domestic growth figures and the possibility that the Bank of England still has room to raise rates.

For traders, the immediate question is whether the dollar's technical break develops into a deeper decline or stabilizes around current support. DXY at the 99.38-99.42 zone, EUR/USD above 1.1580 and GBP/USD near 1.3587 are the levels likely to frame near-term positioning. A dovish interpretation of the Fed minutes could reinforce dollar selling, while a more inflation-focused tone could trigger a temporary rebound.

Frequently Asked Questions (FAQs)

Why is the U.S. dollar under pressure?

The dollar is under pressure because softer U.S. economic data have reduced expectations for another Federal Reserve rate increase. Retail sales slipped in July for the first time in nine months, and markets now see a 70% chance of no change in September.

What are the current odds of a September Fed rate hike?

Market-implied odds of a September Fed rate hike have dropped to 30% from 50%. Expectations for no change are now at 70%, showing that traders have shifted toward a pause.

Why are the Fed's July meeting minutes important?

The minutes may show how policymakers assessed slowing growth and inflation risks. Currency traders will look for signs of whether the Fed is leaning toward holding rates steady or keeping a tightening bias in place.

What is supporting the euro?

The euro is being supported by expectations that the European Central Bank may tighten policy. A Reuters poll conducted August 10-13 showed 57 of 69 economists expected a 25-basis point increase to 2.50%.

What levels matter for the U.S. Dollar Index?

The U.S. Dollar Index is testing the 99.38-99.42 support zone. Resistance is at 100.06, 100.82 and 101.62, while a break below 99.38 would expose 98.76 and 98.18.

Is GBP/USD still bullish?

GBP/USD remains technically constructive while it holds above the 1.3510 and 1.3539 area. Resistance is near 1.3587, followed by 1.3627 and 1.3670.

What is the key level for EUR/USD?

The key level for EUR/USD is 1.1580. The pair remains bullish above that level, while resistance sits at 1.1622, 1.1655 and 1.1686.

Could EUR/USD pull back soon?

A short-term pullback or consolidation is possible because RSI is at 72, placing momentum in overbought territory. However, the bullish structure remains intact while the pair holds above 1.1580.

What should forex traders watch next?

Forex traders should watch the Fed's July meeting minutes, upcoming eurozone flash PMIs and confidence indices, and UK inflation and labour market data. These releases may determine whether policy divergence continues to narrow.

Photo by Ibrahim Boran on Pexels