The US dollar didn't budge after a weak jobs report. That was the first hint that sustained gains for the greenback have gotten far more difficult to achieve.
In a note from MUFG’s Derek Halpenny, highlighted by FXStreet, the analyst points out that Friday's negative Nonfarm Payrolls (NFP) print failed to spark a strong reaction in the Dollar or rates. The explanation lies in the calendar: markets are locked in wait-and-see mode, anticipating the Consumer Price Index (CPI) release and another NFP report before the next Federal Open Market Committee (FOMC) meeting on September 16. It appears the hurdle rate for a dollar rally has been ratcheted higher, forcing the currency to clear two more major economic releases just to validate its current price. This follows a pattern of unemployment claims creeping higher as the job market thins.
The Dollar Stalls as Its Primary Fuel Runs Dry
Historically, a surprisingly weak jobs report would trigger a knee-jerk dollar sell-off on lowered Fed hike odds, or a flight-to-safety bid if risk assets plunged. Neither happened. Halpenny notes that this caution makes sense because "the two CPI reports and another NFP report before the next FOMC meeting" mean traders are hesitant to strip out too much of the existing hawkish pricing. The immediate probability of a September hike did fall, but only from 55% to 40%. The market is paralyzed by the proximity of the next two verdicts.
Crucially, the data undercut a core inflation narrative. Halpenny states:
"Still, the YoY rate for average hourly earnings fell from 3.5% to 3.2%, confirming the full retracement back to pre-covid levels and certainly underlining the lack of inflationary pressures coming from the labour market."
Wage growth, a key Fed worry, has now normalized. This removes a primary argument for further aggressive tightening, leaving the dollar without a fundamental driver until new evidence arrives.
The September Gauntlet: Two Reports That Will Decide the Dollar's Fate
Markets face a brutal two-step verification process before the Fed's September meeting. Each report carries a distinct weight, creating a binary outcome path for the currency.
The Wednesday CPI Crucible
Halpenny identifies the upcoming CPI as "the key macro release of the week." The focus will be laser-locked on the core reading. He directly frames the stakes:
"Let’s see what the CPI data bring on Wednesday but another weaker than expected core CPI print (which would be the third month in a row) along with last week’s weaker jobs would certainly provide compelling ammunition for the doves on the FOMC."
A third consecutive soft core print would powerfully confirm a disinflationary trend, likely sinking the dollar by pushing that remaining 40% hike probability toward zero.
The Final NFP Arbiter
The subsequent jobs report before the September FOMC is not just another data drop, it’s the tiebreaker. If CPI is soft, a second weak NFP would seal the dovish case. If CPI is hot, a strong jobs report would be needed to reinflate hawkish expectations and propel the dollar. The market's current paralysis stems from refusing to commit until it sees this one-two punch.
The Global Echo of a Flagging Dollar Rally
A dollar that struggles to rally has immediate and divergent consequences worldwide.
For Major Central Banks: A Welcome Respite
The European Central Bank (ECB) and Bank of England (BOE), both grappling with their own inflation battles and fragile growth, would quietly welcome a ceiling on dollar strength. A weaker or stable EUR/USD and GBP/USD alleviates imported inflation pressures for Europe, making their policy tightrope slightly easier to walk. Similarly, emerging market central banks face less intense pressure on their currencies and dollar-denominated debt.
For Markets and Traders: Volatility Over Trend
Range-bound FX conditions benefit different players than trending markets.
Algorithmic and high-frequency traders thrive on choppy, liquidity-driven price action within known ranges.
Fundamental macro funds, however, are sidelined, waiting for the clear trend signal that the September data will provide.
Corporate Treasurers may find hedging easier but forecasting more difficult, as the previous paradigm of broad dollar strength fades.
Scenarios for the Greenback After the September FOMC
The path from here is defined by the combined message of the next CPI and NFP reports. Each path validates or refutes the "higher hurdle" thesis.
Scenario 1: Hawkish Data Clears the Hurdle
A hot CPI print followed by a robust NFP would provide the overwhelming evidence needed. Markets would reprice for a more aggressive Fed, likely clearing the path for a sharp, potentially final, dollar rally as "higher for longer" becomes the base case. The hurdle would be proven surmountable.
Scenario 2: Dovish Data Sends the Dollar Lower
A soft CPI and a confirming weak jobs report would be a one-two punch for dollar bulls. Halpenny’s "compelling ammunition for the doves" would be used, the September hike would be priced out, and the narrative would shift decisively to "peak Fed." The dollar would enter a sustained downtrend, benefiting other major currencies and risk assets like equities and commodities, as we've seen in periods when gold gains on macro uncertainty.
Scenario 3: Contradictory Chaos
A mixed bag, say, strong CPI but weak jobs, would be the worst outcome for directional clarity. It would fracture the Fed committee debate and leave markets oscillating violently with each new speaker commentary. The dollar would churn in a wide, volatile range, punishing trend followers and rewarding nimble, short-term traders.
XOOMAR Analysis: The market's non-reaction to weak jobs is a powerful signal in itself. It tells us the dollar's valuation is now exceptionally data-dependent and event-driven, with little residual momentum. Participants are no longer extrapolating trends; they are awaiting hard judicial verdicts from scheduled economic reports. This environment demands patience and punishes early conviction.
The immediate takeaway is to watch the core CPI print not for its absolute level, but as the first half of a verdict. The second half arrives with the next NFP. Only then will we know if the barrier to dollar gains has been vaulted or if, as the current price action suggests, it remains forbiddingly high. This high-stakes data dependency mirrors the tension in other asset classes, where, for example, crypto's failed breakout leaves Bitcoin trapped awaiting the same macro clues.
Disclaimer: This XOOMAR analysis is for informational and educational purposes only. It is not financial, investment, legal, tax, or professional advice. It does not provide buy, sell, hold, price-target, portfolio, or personalized recommendations. Verify information independently and consult qualified professionals before making decisions.
The Bottom Line
- Traders should anticipate higher volatility around upcoming CPI and NFP reports, as they are now the sole triggers for significant dollar movement.
- The normalization of wage growth to pre-pandemic levels removes a key pillar of hawkish Fed policy, potentially capping the dollar's upside.
- The market's muted reaction to weak jobs data signifies a shift in focus from single data points to cumulative evidence, changing short-term trading strategies.
Originally published on XOOMAR. For more news and analysis, visit XOOMAR.
