US Dollar Outlook: Softer US Data Weighs on Greenback as Fed Hike Bets Fade

The US Dollar starts the new week facing a less supportive macroeconomic backdrop as a series of softer US economic releases encourages investors to scale back expectations for additional Federal Reserve rate increases.

MUFG strategists Derek Halpenny and Lee Hardman say falling short-term US Treasury yields are creating a more challenging environment for the Greenback. Despite the softer backdrop, the US Dollar Index has so far avoided a deeper breakdown and remains above its closely watched 200-day moving average near 99.20.

US Retail Sales Add to Growth Concerns

The latest weakness came from US consumer spending data.

Advance retail and food-services sales fell 0.6% month over month in July to $763.6 billion, following a revised 0.2% increase in June. Sales were still 5.0% higher compared with July 2025, but the monthly contraction added to concerns that domestic demand may be losing momentum.

Consumer spending is a major driver of the US economy, meaning persistent weakness in retail activity could reduce the case for the Federal Reserve to tighten monetary policy further.

For currency markets, softer consumption data can weigh on the Dollar if investors begin expecting lower interest-rate differentials between the US and other major economies.

Weak Payrolls Continue to Pressure Fed Expectations

The labour market has also lost momentum.

The US economy recorded a 23,000 decline in nonfarm payroll employment in July, while the unemployment rate remained at 4.1%. The Bureau of Labor Statistics also revised May and June payroll growth lower by a combined 103,000 jobs, reinforcing the view that employment growth has been weaker than initially reported.

Average monthly payroll growth over the previous 12 months slowed to just 34,000, according to the latest BLS report.

The weaker jobs picture has encouraged markets to reduce expectations for another near-term Federal Reserve rate increase, removing part of the yield support that had previously helped the US Dollar.

Inflation Also Shows Signs of Cooling

July inflation data provided another reason for investors to reassess the Fed outlook.

The Consumer Price Index increased just 0.1% month over month in July, while annual headline inflation eased to 3.4% from 3.5% in June. Core inflation, excluding food and energy, rose 0.2% on the month and slowed to 2.5% year over year.

Although inflation remains above the Federal Reserve's 2% target, the latest numbers indicate that underlying price pressures are moving in a more favorable direction.

This combination of softer inflation, weaker employment and declining retail sales makes it more difficult for markets to maintain aggressive expectations for further monetary tightening.

Federal Reserve Still Maintains a Restrictive Stance

The Federal Reserve kept the federal funds target range unchanged at 3.50% to 3.75% at its July 29 meeting.

However, the decision was not unanimous. Three policymakers preferred a 25-basis-point rate increase, highlighting that inflation remains a significant concern inside the central bank. The Fed also stated that inflation remains elevated relative to its 2% objective.

This creates a mixed environment for Dollar traders.

Economic data increasingly argues for patience, while several Fed policymakers continue to emphasize inflation risks. Upcoming Fed communications will therefore remain important for determining whether September tightening stays on the table.

US Dollar Technical Outlook

MUFG highlights the 99.20 region as an important technical area for the US Dollar Index because it roughly aligns with the 200-day moving average.

As long as DXY remains above that area, the Dollar may continue consolidating rather than entering a more aggressive downtrend.

A sustained break below the 200-day average, however, could strengthen bearish momentum and increase the risk of a deeper Dollar correction.

On the upside, any renewed rise in Treasury yields or stronger-than-expected US data could provide temporary support to the Greenback.

Dollar Outlook

MUFG expects the US Dollar to weaken modestly heading into next year, with the recent decline in short-term yields and softer economic data creating a less favorable backdrop for the currency.

The outlook does not necessarily point to a sharp Dollar selloff. Inflation remains above target, Fed officials continue to signal caution, and the US economy has not entered a clear downturn.

Instead, the current environment favors a gradual loss of Dollar support if upcoming economic releases continue to disappoint.

For forex traders, that could create opportunities in major Dollar pairs such as EUR/USD, GBP/USD, AUD/USD and NZD/USD, although future moves will remain highly sensitive to Federal Reserve policy expectations and US Treasury yields.