US Dollar May Collapse As Fed Rate Cut Looms. Forecast as of 15.08.2025
When inflation is rising, lowering Fed rates is complete nonsense. However, such instances are not unprecedented in the history of the US economy. In 2007–2008, the US dollar lost 8% of its value. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Accelerating producer prices led to a pullback in the EURUSD pair.
- The Treasury Secretary is not giving any recommendations to the Fed.
- History shows that the USD index may fall by 8%.
- Purchases of EURUSD are relevant while the pair is trading above 1.165.
Weekly US Dollar Fundamental Forecast
Fear has returned to the markets. The fastest monthly increase in producer prices in over three years has forced investors to take a step back and reassess the situation. The US economy is on the verge of a stagflation shock. But that’s not the worst of it. A rate cut against soaring inflation is a devastating scenario for the US dollar.
US PPI Inflation Change
Source: Wall Street Journal.
The producer price index is an extremely volatile indicator. However, when combined with consumer prices, it provides a clear opportunity to assess the personal consumption expenditure index, the Fed’s preferred inflation indicator. The PCE index has clearly accelerated from 2.8% to 2.9%. It is moving away from the central bank’s target, which will undoubtedly cause FOMC members to doubt a rate cut.
Notably, a 50 bps cut in September is completely off the table. San Francisco Fed President Mary Daly asserts that this action would create a sense of urgency, demonstrating the Fed’s commitment to revitalizing the crippling labor market. She is certain that the US job market is not fragile.
The acceleration of the PPI will not force the Fed to abandon the resumption of the monetary expansion cycle. The central bank will lower rates amid rising inflation. History has already shown that this combination is dangerous. Bank of America draws parallels with 2007–2008. Back then, shocks in supply chains drove up food and energy prices. Nevertheless, the Fed slashed borrowing costs as weakness spread to the real estate and labor markets.
US Inflation and Fed Funds Rate
Source: Bloomberg.
Against this backdrop, the US dollar suffered the most. The USD index plummeted by 8% in the second half of 2007 and the first half of 2008. Its weakness was already evident even before the Fed’s monetary expansion. The greenback has lost more since early 2025, but the impact of lower federal funds rates amid rising inflation has not yet been fully reflected in the EURUSD pair. The main currency pair has room to grow.
There will certainly be pullbacks. The reasons for the correction may be surprising, whether they come from macroeconomic indicators, as in the case of the PPI, or comments from officials. Scott Bessent’s excuses only reinforced the US dollar’s strength. The Treasury Secretary made it clear that he did not dictate the Fed’s actions. He stressed that economic models clearly showed rates at 150–175 bps below the current level.
Weekly EURUSD Trading Plan
Indeed, the US administration wants to see lower rates and a weaker US dollar. The Fed will likely continue its cycle of monetary expansion in September. Therefore, the outlook for the EURUSD pair is bullish. As long as the euro is trading above 1.165, long trades can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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