The US dollar exchange rate remained stable on Wednesday (September 10th), with the market closely watching the upcoming release of US inflation data. These key economic indicators may directly influence the Federal Reserve's decision on interest rate cuts at its policy meeting next week. The market generally expects the Fed to cut interest rates at its meeting on September 16-17, but there is still disagreement on whether the reduction will be 25 or 50 basis points.

Economic data and policy expectations

The latest employment data showed signs of a deteriorating labor market, further reinforcing market expectations for a Federal Reserve rate cut. Markets are broadly pricing in a 25 basis point rate cut next week and placing a 5% chance of a 50 basis point cut. They expect the Fed to ease policy by 66 basis points this year.

Kieran Williams, head of Asian FX at InTouch Capital Markets, said: "To achieve a 50 basis point rate cut, core inflation data needs to be significantly lower than expected to embolden the doves. Given the stickiness of service prices and the Fed's preference for gradual policy adjustments, the possibility of a large rate cut is low."

Foreign exchange market performance at a glance

The foreign exchange market performed relatively flat during the European trading session:

EUR/USD was flat at 1.1695;

GBP/USD fluctuated around 1.3527;

USD/JPY remained around 147.45;

AUD/USD rose 0.3% to 0.6603, close to a seven-week high;

The dollar index held steady at 97.82. The index has fallen about 10% in 2025.

Markets focus on whether Fed Governor Cook will stay or go

Markets showed little reaction to a federal judge on Tuesday temporarily blocking President Trump's removal of Federal Reserve Governor Tim Cook, a case that could ultimately reach the U.S. Supreme Court.

Markets are closely watching the unprecedented legal battle because it could upend the Federal Reserve's long-held independence.

Geopolitical issues also came to the fore again after Poland said it had activated its own and NATO air defences to shoot down drones following Russian airstrikes in western Ukraine.

Will the Federal Reserve cut interest rates three times this year?

The U.S. economy probably created 911,000 fewer jobs in the 12 months through March than previously estimated, the government said on Tuesday, suggesting that job growth had already stalled before President Trump imposed broad tariffs on imports.

While the report highlighted cracks in the labor market, bets on a rate cut remained intact as markets downplayed the backward-looking data, saying it did not provide any information on job creation since March.

"I think a 50 basis point rate cut would do more harm than good to market confidence at this point, and besides, the Fed will want to save face and not completely bend to Trump's wishes," said Matt Simpson, senior market analyst at Brisbane City Index.

“Markets are currently pricing in three rate cuts over the next three meetings, and the Fed is in a good position to either align with those expectations or increase the odds of a 2026 rate cut – without being forced to cut by 50 basis points next week,” Simpson said.

Markets have also been watching global politics, with a focus on who will succeed Shigeru Ishiba as Japan's next prime minister and France's fifth prime minister in two years amid growing fiscal concerns.

“Fundamental risks are now tilted towards fiscal easing amid growing protests and pressure to fund populist social programs,” said InTouch’s Williams.

At 15:21 Beijing time, the US dollar index is currently at 97.85.