The Federal Reserve is expected to cut interest rates in July as inflation continues to moderate in the United States. According to CME FedWatch data, the probability of a 25 basis point rate cut has risen to over 65 percent, significantly higher than one month ago. This shift in expectations is driven by core PCE remaining below 2.5 percent for three consecutive months.
The US Dollar Index has fallen below 104, hitting a three-month low. The euro has strengthened to above 1.09 against the dollar, while GBP/USD broke through 1.28. Non-dollar currencies are showing collective strength in early July 2026.
Traders widely expect the dollar could fall further to 102-103 if the Fed cuts rates in July. However, some analysts believe the resilience of the US service sector could delay the rate cut. This week retail sales data will be a key indicator for market direction.
From a technical perspective, the dollar index has strong support near 103.50. If this level breaks, the decline could accelerate. EUR/USD faces its next resistance at 1.1050 after holding above 1.09. USD/JPY remains volatile around the 160 level.
For forex traders, the current environment offers both opportunities and challenges. The weakening dollar provides opportunities to go long on non-dollar currencies, but policy divergence among central banks means increased volatility. Traders should stay tuned to Fed speeches and upcoming US economic data.
Commodity currencies are benefiting from Chinas moderate economic recovery. AUD/USD has climbed above 0.67, while CAD remains supported by high oil prices. The prospect of a rate cut cycle is reshaping the global forex landscape in the second half of 2026.
Looking ahead, the pace of Fed rate cuts will be the main theme for forex markets. If US economic data continues to soften, a second rate cut in September cannot be ruled out. ECB and BOE policy directions will also influence major currency pairs.