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The week ahead is critical for shaping the dollar's next move. After the FOMC cut rates by 25 basis points last week, the dollar weakened against most major currencies, and markets are now waiting for the release of data that had been delayed by the shutdown. On Tuesday, labor market reports for both October and November will be published, followed by inflation data on Thursday. These releases will allow markets to reassess both the outlook for the dollar and the Federal Reserve's next steps.
The rate has now been cut for the third consecutive time, which Powell describes as "risk management." But what risks are actually being referred to? Markets are currently pricing in two rate cuts in 2026. If expectations shift toward an additional cut, the dollar would undoubtedly respond with another decline.
Inflation remains above the 2% target, so if tomorrow's labor market reports show further cooling, rate expectations could shift in favor of a third cut. All this comes against the backdrop that November's cut appears to have been a political rather than an economic decision. A portion of FOMC members was firmly opposed to cutting rates, and the data released this week should reveal who was right.
As of September, the unemployment rate stood at 4.4%, the highest level since October 2021, and the University of Michigan's November survey showed that consumers expect unemployment to rise further. Layoffs are increasing, while job creation is growing only minimally. After Wednesday's meeting, Powell noted that job creation "may be effectively negative," hinting that he expects negative developments ahead.
Weak reports can therefore be expected, and in that case the dollar risks not just declining, but collapsing—primarily against the euro and the yen. On Thursday, just ahead of the U.S. inflation release, the ECB and the Bank of England will hold their policy meetings, followed by the Bank of Japan on Friday. The Bank of England faces a difficult situation and may cut rates. As for the ECB, sentiment toward the euro has clearly turned hawkish: the question of a rate cut is no longer on the table, and the market is now debating when the ECB will begin raising rates. This rebalancing could put strong intraday pressure on the dollar, which would intensify if the inflation report fails to show rising prices.
The very next day, the market expects the Bank of Japan to raise rates from 0.50% to 0.75%, which could lead to a sharp strengthening of the yen.
The Fed's own position also appears uncertain. Several key personnel decisions are expected in the spring, which will alter the balance between hawks and doves. Jerome Powell is set to step down, and the Fed may become more inclined toward further policy easing. The market is pricing in two cuts next year, while the current FOMC composition points to only one (based on the median individual rate outlook). In the end, there could be three or more cuts. The market is forced to take this possibility into account, especially against the backdrop of increasingly clear signals of an approaching recession.
Thus, the dollar risks coming under growing pressure from several directions at once. This week will be decisive and may lay the foundation for a long-term trend. We expect rising volatility and a broad-based decline in the U.S. dollar across the currency market.
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