By Felipe Barragán, Expert Research Strategist at Pepperstone

September 17, 2025 – “The dollar spent Tuesday on the defensive as traders leaned into a “cut-and-guide” Fed narrative, treating firmer U.S. data as noise and policy guidance as the real signal for markets. August retail sales and control-group measures surprised to the upside, suggesting consumers are still spending into the fall, suggesting the Fed will cut come at a moment where the US economy is holding strong, supporting the narrative of a “soft landing”. That combination let rate-cut odds harden into the September meeting and nudged the DXY lower during the trading session.

Two forces dominated the tape. First, front-end expectations: markets are effectively conditioned for a 25 bps Fed cut this week, with a non-trivial tail for more aggressive easing later in the year. In that setup, small upside surprises in growth data struggle to lift the dollar unless they also move the dots or the guidance on the pace of cuts. The result is a currency that reacts more to the Fed’s tone than to one-month macro beats. Second, policy divergence is no longer running in the dollar’s favor at the margin as improving euro-area industry data didn’t hand the dollar much help, reinforcing that the near-term FX impulse is mostly coming from U.S. policy direction.

Micro drivers filled in the picture. Gold’s push to fresh records underscored the drop in dollar “carry” and the bid for duration-sensitive hedges—another tell that real-rate expectations are easing into the Fed. Unless the Fed’s projections and press conference lean hawkish—via a slower cutting path, higher long-run dots, or pushback on financial-conditions loosening—the balance of risks keeps the DXY biased lower on rallies.

Looking forward, the path for the dollar hinges on three questions the Fed will answer Wednesday: (1) pace of cuts through year-end, (2) tolerance for easier financial conditions if inflation progress is merely “good enough,” and (3) how much the Committee leans on softening labor indicators versus still-resilient spending. A “dovish cut” that validates front-end pricing should extend dollar softness; a “hawkish cut” that guides to a slower path and higher real rates could stabilize the DXY near current levels. In the absence of a hawkish surprise, dips are likely to find sellers of the dollar rather than buyers in the very near term.”