The dollar's decline in the past two months may not last long in the future. This scenario is exactly the same as the false signal triggered by last year's non-agricultural data. The US dollar fell significantly after the Federal Reserve's interest-rate meeting on Wednesday (September 17), and soon rebounded after the Powell press conference. Given that the overall data still shows economic resilience and concerns about the independence of the Federal Reserve currently seem overstated, the market may revise expectations for interest rate cuts again, thereby injecting new upward momentum into the US dollar.
Looking back at the same period in 2024, the US dollar index bottomed out and rebounded, and surged 10% in the following months due to major market revisions to the Fed's interest rate cut expectations. The weakness in summer non-farm reports ultimately proved to be a huge false signal for the labor market. Looking at the current situation, the trend of the US dollar is likely to repeat itself in history.
There are also differences-for example, there were no concerns about the independence of the Federal Reserve at this time last year, and there is no need to deal with the presidential election factor this time-but the background pattern is surprisingly similar. A year ago, the market expected that the interest rate will be cut by nearly 250 basis points by September 2025, and the actual interest rate cut was 125 basis points. Labor market conditions continue to exceed expectations.
Be wary of false signals from non-agricultural agriculture in summer
The market's pricing of interest rates as of September 2026 has eliminated expectations of interest rate cuts exceeding 100 basis points (excluding this week's interest rate cut). Current pricing logic is once again based on the fear that an environment of low hiring, low firing will ultimately push up unemployment.
This may indeed be the case, but assuming you don't have access to non-farm reports but have access to all other economic data, will those data strongly suggest a significant interest rate cut? Maybe there is a demand in real estate, but what about other areas? Just look at this week's data: retail sales are growing rapidly; jobless claims hit multi-year lows.
We (and certainly the Federal Reserve) seem to rely too heavily on an employment report that has sent only false signals for years. A total of 1.7 million jobs have been downgraded in the past two years, coupled with the significant downgrades already existing in monthly data, is enough to prove that this report is untrustworthy. The only consistent thing is unemployment and claims data, which send a very different message: thelabor market remains stable, not stagnant.
As was the scenario 12 months ago, if a slowdown in employment fails to push up the unemployment rate, markets may need to revise sharply again expectations for the size of interest rate cuts-especially as inflation continues to deviate from the 2% target. If full employment is maintained, it will be difficult for the Fed to view the impact of tariffs on commodity prices as a temporary factor, as it may add to upward pressure on wages.
Of course, the recent surge in expectations of interest rate cuts stems not only from concerns about the labor market, but also from concerns about the weakening of the Federal Reserve's government's independence. Unlike Trump's first term, which was full of wanton criticism on social media, his second term's push for interest rate cuts was more strategic-by appointing committee members who were in line with the president's wishes, which naturally led to the belief that interest rates might be significantly lower than they should have been.
The risks do exist, but if this week's signs are used as a guide, the risks posed by the Fed's loss of independence may be avoided, meaning policy will not be automatically set to extremely loose to ensure that the economy overheats. It is true that new director Stephen Milan voted against a 50 basis point rate cut and is likely the FOMC member who predicted a further 150 basis point rate cut this year, but he is clearly an extreme exception.
Importantly, the other Trump appointees-Christopher Waller and Michelle Bowman-voted unanimously with other committee members to support a 25-point rate cut, preventing the three policymakers from following the political line to support a larger rate cut.Although this is only one meeting, it should at least allay concerns that future policies will be based on non-economic factors.
Even if Milan is appointed as the next chairman of the Federal Reserve, a significant rate cut will not be possible unless he can persuade other committee members to follow his lead. Although his forecast for year-end interest rates is low, it is worth noting that this week's median federal funds rate is expected to increase only one additional rate cut compared with the forecast three months ago. If the market expected evidence of significant damage to the Fed's independence, unfortunately this meeting did not provide it.
For the US dollar, combined with evidence of economic resilience beyond non-agricultural reports, this inevitably raises questions about whether the downward trend since the "Liberation Day tariff" turmoil will continue to widen. From a technical perspective, recent price movements suggest that the US dollar index may have formed a short-term bottom.
Judging from the daily chart, the "puncture pattern" formed on Wednesday (September 17) after the Federal Reserve meeting is a classic reversal signal-the pattern gapped short and opened low to hit a new low, but reversed strongly in subsequent trading sessions. This signal was reinforced by follow-up buying on Thursday and prices are now testing short-term downtrend resistance (around 97.50).
Momentum indicators also showed signs of turning: the relative strength index RSI (14) broke through the downtrend line and rebounded towards a neutral level; although MACD did not confirm the turn, its return to the signal line at least indicates that downward pressure is easing.
Although it is necessary to remind that the dust has not yet settled on Friday, in terms of current trends, the "hammer line" of the weekly chart also constitutes a classic reversal pattern. Historical experience shows that various patterns on the weekly chart of the US dollar index, whether bullish or bearish, often provide reliable forward-looking signals.
Although not many investors directly trade the US dollar index, this signal can be used to assess the movements of other currency pairs, especially the euro/US dollar and US dollar/Japanese yen-these two currencies have the absolute dominant weight in the US dollar index.
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