U.S. Dollar Consolidates as Fed Caution Caps Downside

Jasper Osita - Market Analyst

2025-09-24 14:37:28

The Fed’s cautious stance after its rate cut has limited aggressive dollar downside.
Weak U.S. business activity and euro strength continue to pressure USD momentum.
The dollar consolidates between 97.199–97.864, awaiting a breakout from the H4 Fair Value Gap.

The U.S. Dollar is entering a period of consolidation as markets weigh the Federal Reserve’s cautious tone against weakening domestic data and shifting global flows. Following the Fed’s 25 bp cut, policymakers emphasized lingering inflation risks, which kept the dollar from slipping into a deeper selloff. Yet softer business activity, euro strength, and pressure on emerging markets highlight the headwinds facing USD in the near term. With the Dollar Index (DXY) now trading between 97.199 and 97.864, all eyes are on the H4 Fair Value Gap as the key technical zone that will determine whether the next move is a bullish breakout or a deeper bearish extension.

Fed Caution Limits Aggressive Dollar Selloff

The Federal Reserve’s latest 25 bp rate cut was followed by cautious remarks from Fed officials. Policymakers stressed that inflation risks remain, signaling they are not in a rush to deliver deeper cuts. This tempered dovish expectations and kept the dollar from sliding further.

Though CME Fed Watch Tool indicates that a potential 91.9% rate cut on October is still being seen as a threat for further downside on the U.S. Dollar, something to be cautious about.

Weak U.S. Business Activity Rekindles Dovish Bets

Softening U.S. business activity has pressured the growth outlook. While not recessionary, the data encouraged markets to price in more easing, weighing on the dollar’s momentum and supporting risk assets such as equities and gold.

Emerging Markets Feel the Dollar Strain

The dollar’s resilience is evident in emerging markets. India’s rupee fell to record lows beyond 88/USD, highlighting how dollar volatility quickly impacts EM FX.

Underscores the dollar’s role as the global liquidity anchor.
Suggests further USD breakouts could intensify EM pressure.

Euro Strengthens Amid Diverging Outlooks

The euro gained traction as traders leaned into the view that the Fed is closer to easing than the ECB. This cross-currency pressure has capped the dollar’s upside and reinforced its current consolidation.

Institutional Voices Warn of Medium-Term Weakness

Longer-term risks continue to cloud the dollar’s outlook. Analysts point to rising U.S. debt levels, fiscal imbalances, and reserve diversification as reasons why dollar strength may fade over time. While these factors do not dictate short-term price action, they add weight to a bearish structural narrative.

Technical Outlook

The U.S. Dollar Index (DXY) remains in consolidation, trading between 97.456 and 97.199 after rejecting the H4 Fair Value Gap (97.701–97.568). Resistance stands at 97.864, with broader support anchored at 96.218.

Bullish Scenario: Breakout Through Resistance

Price pushes back into the H4 Fair Value Gap (97.701–97.568), holding above 97.456.

A clean reclaim of this imbalance sets the stage for a run at 97.864.

A breakout and close above 97.864 confirms bullish continuation, opening the path to 98.20–98.50.
This scenario would likely unfold if U.S. yields firm up, risk-off sentiment drives safe-haven flows, or Fed commentary leans less dovish.

Bearish Scenario: Failure at Fair Value Gap

Price retests the H4 Fair Value Gap (97.701–97.568) but fails to sustain momentum above it.

Sellers defend the zone, driving the index back below 97.456.

A breakdown through 97.199 would expose the key support at 96.218.
A decisive break beneath 96.218 could extend declines into the 95.50–95.20 zone.
This scenario would be triggered by dovish Fed guidance, weak U.S. data, or stronger performance in risk assets and alternative currencies.

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Jasper has been in the markets since 2019 trading currencies, indices and commodities like Gold. His approach in the market is heavily accompanied by technical analysis and of course, supported by fundamentals. He has a background in trading proprietary firms and has been teaching students how to navigate themselves in the markets from basic to advance concepts.