What to Know

  • U.S. employers added 162,000 jobs in August, the strongest increase in five months.
  • The unemployment rate held at 4.1%, while annual wage growth eased slightly to 3.1%.
  • Markets now assign roughly a 57% probability to a September Federal Reserve rate increase, up from less than 50% before the payrolls release.
  • U.S. PPI and CPI reports are the next major tests for the dollar, with persistent inflation potentially strengthening the case for more Federal Reserve tightening.
  • The European Central Bank decision is a key catalyst, with economists broadly expecting a 25-basis-point increase that would take the deposit rate to 2.50%.
  • Eurozone inflation accelerated to 3.3%, keeping tighter European policy in focus.
  • Deutsche Bank has projected another European Central Bank increase in December as sustained energy inflation could extend the tightening cycle.
  • The U.S. Dollar Index is trading around 99.07 on the 4-hour chart, with 98.83 support and 99.47 resistance in focus.
  • GBP/USD is around 1.3530, while EUR/USD is near 1.1620 as traders assess whether rebounds can clear overhead resistance.

Dollar Starts the Week With a Stronger Policy Backdrop

The U.S. dollar begins the week with a firmer fundamental base after stronger August employment data revived expectations that the Federal Reserve may still have room to raise rates in September. The labor market showed more resilience than many economists had anticipated, with employers adding 162,000 jobs in August. That marked the strongest increase in five months and helped reopen the debate over whether policy is restrictive enough to bring inflation back under control.

The unemployment rate remained at 4.1%, signaling that the broader labor market has not weakened materially. At the same time, annual wage growth eased slightly to 3.1%, limiting evidence of a fresh wage-driven inflation surge. For dollar traders, that mix matters. Strong job creation supports the argument for tighter policy, while softer wage momentum reduces the risk that the Federal Reserve is facing an immediate acceleration in labor-cost pressure.

Market pricing has shifted in response. Traders now assign roughly a 57% probability to a September Federal Reserve rate increase, compared with less than 50% before the payrolls data. That move has strengthened the dollar’s policy backdrop, but it has not produced a decisive breakout in the Dollar Index. The reason is that foreign exchange markets are not assessing the Federal Reserve in isolation. They are also weighing whether the same energy shock lifting inflation risks in the United States could push other major central banks toward tighter policy.

Inflation Data Becomes the Next Test for Fed Expectations

The next major catalysts for the dollar are U.S. PPI and CPI figures. If inflation remains persistent, market participants may see a stronger case for additional Federal Reserve tightening. A firm inflation reading would reinforce the view that the central bank cannot declare victory too early, especially if employment remains resilient and price pressures are still being affected by energy costs.

However, the dollar’s response may depend on whether U.S. inflation data changes expectations more than it changes views on other central banks. Currency markets trade on relative policy expectations. If inflation pressures are seen as a global issue rather than a uniquely American problem, the dollar may receive only limited support because the euro and pound could also benefit from higher expected interest rates in Europe and Britain.

U.S. markets are closed Monday for Labor Day, leaving trading conditions comparatively subdued before the inflation releases. Lower liquidity can sometimes exaggerate short-term moves, but traders may be reluctant to press large directional bets until the data provide a clearer signal. For now, the fundamental bias around the Dollar Index is neutral-to-bullish, reflecting stronger Federal Reserve expectations but also meaningful resistance from parallel tightening risks abroad.

ECB Decision Keeps Euro Supported

The euro’s near-term outlook is tightly linked to the upcoming European Central Bank decision. Economists overwhelmingly expect a 25-basis-point increase, which would take the deposit rate to 2.50%. That expectation has helped support the euro even as the dollar benefits from stronger U.S. labor data. Eurozone inflation accelerated to 3.3%, reinforcing the view that policymakers may still need to lean against price pressures.

Deutsche Bank has gone further by forecasting another increase in December. The reasoning is that sustained energy inflation could make the tightening cycle longer than previously expected. For FX traders, this matters because a longer European Central Bank tightening path may limit the dollar’s ability to expand its relative yield advantage. Even when U.S. data are strong, the euro can remain resilient if investors believe European rates also need to move higher.

The current euro bias is moderately bullish from a fundamental perspective, but it is not without risks. A central bank decision that matches expectations may not be enough to push EUR/USD sharply higher unless policymakers sound convincingly hawkish. Conversely, any signal that officials are becoming more concerned about growth could soften the euro’s rate-supportive narrative.

Sterling Faces Inflation and Growth Crosscurrents

Sterling is also caught between inflation risks and domestic vulnerabilities. Bank of England Chief Economist Huw Pill has argued that raising rates sooner could help prevent the Iran-related energy shock from becoming embedded in domestic inflation. That perspective keeps additional tightening risk alive and provides some support for the pound.

At the same time, Britain’s elevated borrowing costs and fiscal pressures ahead of the October 28 budget remain a vulnerability. A currency can benefit from higher interest-rate expectations, but only up to the point where those expectations begin to damage confidence in growth or fiscal stability. For GBP/USD, that leaves the fundamental bias neutral-to-bullish rather than decisively bullish.

Market participants are therefore likely to treat sterling rallies with some caution until the pair can clear important technical levels. The pound has support from the possibility of tighter Bank of England policy, but it also faces concerns that higher rates could deepen pressure on the economy and public finances.

Dollar Index Technical Picture: 98.83 and 99.47 Define the Range

The U.S. Dollar Index is trading around 99.07 on the 4-hour chart. Price has struggled to advance after recovery stalled near 99.08, close to the 23.6% Fibonacci level. The index also remains below the 50-EMA, the 100-EMA and a broken rising channel, which suggests that the short-term technical structure is still weak despite the stronger employment-driven fundamental backdrop.

The first support level to watch is 98.83. A clear break below 98.83 would expose 98.68 and 98.56. On the upside, resistance is seen at 99.08, followed by 99.23, 99.35 and 99.47. Technical traders may view the current move as a corrective bounce unless the Dollar Index can deliver a stronger close above the upper resistance area.

Momentum also remains important. Until RSI rises above the midline, some chart watchers are likely to maintain a bearish short-term focus while the index holds below 99.23 and 99.35. A 4-hour close above 99.47 would be needed to shift that focus more decisively, while a loss of 98.83 would strengthen the downside case.

GBP/USD Technical Picture: Buyers Defend 1.3477, but Resistance Holds

GBP/USD is trading around 1.3530 on the 4-hour chart after another recovery from the 1.3477 support zone. Buyers are defending the rising trend line under price, but the pair is still struggling to redefine resistance between 1.3526 and 1.3565. It also remains below both moving averages, which limits confidence in the rebound.

The first resistance zone sits around 1.3526 to 1.3540, with 1.3565 above it. A larger supply zone is located at 1.3656 to 1.3676. On the downside, 1.3477 remains a key level, followed by 1.3435 and 1.3400. This makes the current area important: sterling has rebounded, but it has not yet proven that the recovery can become a larger bullish move.

RSI is recovering from oversold territory, supporting the bounce. Even so, some technical traders may maintain a neutral-to-bearish outlook until GBP/USD closes above 1.3565. A break below 1.3477 would confirm renewed pressure and could encourage expectations for lower prices.

EUR/USD Technical Picture: 1.1625 Is the Immediate Test

EUR/USD is trading around 1.1620 on the 4-hour chart after rebounding from the 1.1571 support zone. Price has recovered above the 100-EMA and is testing resistance near 1.1625. However, the broader recovery is still capped by a descending trendline from the August highs, keeping the short-term setup mixed.

Immediate resistance levels are located at 1.1625, 1.1659, 1.1686 and 1.1711. Support begins at 1.1599, followed by 1.1571 and 1.1545 in the 1.15 zone. The pair is therefore positioned at a technical decision point: a sustained break higher could improve sentiment, while failure near resistance could keep the bearish bias intact.

RSI is recovering, showing improved upward momentum, but it has not fully removed downside risk. Some chart watchers remain neutral with a bearish bias while EUR/USD holds near 1.1599 and below trendline resistance. A fall below 1.1571 would weaken the recovery, while a higher close through the descending trendline and 1.1625 could open the way toward 1.1659 and higher levels.

FX Outlook: Policy Divergence Is Harder to Trade

The broader FX picture is more complicated than a simple strong-dollar story. U.S. jobs data have strengthened the Federal Reserve tightening narrative, but the euro and pound are also receiving support from the possibility that their central banks may need to stay restrictive. When multiple central banks face similar inflation pressure, yield spreads may not move enough to produce clean currency trends.

For the Dollar Index, the near-term setup remains neutral-to-bullish fundamentally but technically fragile. EUR/USD has moderate fundamental support tied to European Central Bank expectations, while GBP/USD carries a neutral-to-bullish fundamental bias but must navigate domestic fiscal and growth concerns. Until U.S. inflation data and the European Central Bank decision provide clearer direction, traders may continue to focus on the defined technical ranges rather than assuming a major breakout is already underway.

Frequently Asked Questions (FAQs)

Why did the dollar outlook improve?

The dollar outlook improved because U.S. employers added 162,000 jobs in August, the strongest increase in five months. That revived expectations for a possible September Federal Reserve rate increase.

What is the market probability of a September Fed rate increase?

Markets now assign roughly a 57% probability to a September Federal Reserve rate increase, compared with less than 50% before the payrolls report.

Why are PPI and CPI important for the dollar?

PPI and CPI are important because persistent inflation could strengthen the case for additional Federal Reserve tightening. Strong inflation data may support the dollar if it increases expectations for higher U.S. rates.

What is the key level for the U.S. Dollar Index?

The first major support level for the U.S. Dollar Index is 98.83. Resistance is seen at 99.08, 99.23, 99.35 and 99.47.

Why is the ECB decision important for EUR/USD?

The European Central Bank decision is important because economists broadly expect a 25-basis-point increase that would take the deposit rate to 2.50%. A tighter policy stance can support the euro.

What levels matter most for EUR/USD?

EUR/USD is testing resistance near 1.1625. Additional resistance is at 1.1659, 1.1686 and 1.1711, while support is at 1.1599, 1.1571 and 1.1545.

What levels matter most for GBP/USD?

GBP/USD has key resistance around 1.3526 to 1.3540, followed by 1.3565 and the larger supply zone at 1.3656 to 1.3676. Key support is at 1.3477, 1.3435 and 1.3400.

Is sterling bullish or bearish?

Sterling has a neutral-to-bullish fundamental bias because Bank of England tightening risk remains in focus. However, technical traders may stay cautious until GBP/USD closes above 1.3565.

What could change the Dollar Index technical outlook?

A 4-hour close above 99.47 would be needed to change the short-term bearish technical focus. A break below 98.83 would instead expose lower levels at 98.68 and 98.56.

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