Dollar Rebounds as Powell Stays Cautious on Easing

The U.S. dollar firmed on Wednesday, recovering from near one-week lows after Federal Reserve Chair Jerome Powell reiterated a cautious stance on the outlook for monetary easing. Markets, however, still priced in two more quarter-point rate cuts this year, keeping traders focused on incoming inflation data.

Dollar Index and Major Pairs

The U.S. dollar index climbed 0.35% to 97.575, rebounding after touching 97.198 overnight—its lowest since last Thursday. Against the yen, the greenback added 0.29% to 148.07, while the euro slipped 0.4% to $1.177 as German Ifo business climate data disappointed. Sterling fell 0.3% to $1.3482, while the Aussie dollar gained 0.23% to $0.6614 after CPI data surprised on the upside at 3%.

Powell’s Message and Market Positioning

Powell warned against both premature easing—which could entrench inflation—and overly tight policy that risks damaging employment. His remarks echoed the Fed’s balanced, data-driven stance from last week’s policy meeting, which delivered a 25 bps cut but stopped short of stronger dovish signals.

Despite this, traders still see rate reductions ahead. CME FedWatch shows expectations for two cuts in 2025 and one more in early 2026, though near-term bets on an October cut have been pared slightly following Fed speakers’ hawkish tones.

European and Australian Backdrop

In Europe, sentiment around the euro weakened after German business morale fell unexpectedly in September, underlining fragility in the eurozone’s growth outlook. Meanwhile, Australia’s inflation beat has complicated expectations for further RBA easing, with markets trimming the chance of another 2025 rate cut to around 33% by year-end.

Data in Focus

This week’s key test for the dollar will be the PCE price index release on Friday— the Fed’s preferred inflation gauge—expected to show inflation holding sticky at 2.8% YoY. Core readings are likely to remain above the Fed’s 2% target, keeping policymakers cautious.