US Dollar Forecast: Will DXY Rally Continue or Collapse on NFP Data?

Published: January 8, 2026

Key Points

• The US Dollar Index (DXY) reached a one-month high of 98.984 but retreated as traders adjusted positions ahead of the Non-Farm Payroll (NFP) report.
• Expectations of aggressive rate cuts by the Federal Reserve (Fed) in 2026 could weaken the dollar, especially if the upcoming NFP report is disappointing.
• Current market pricing indicates an 82% probability of no rate cut at the Fed's January meeting, suggesting that the dollar's recent rally may be fully priced in.

Market Overview

The U.S. Dollar Index has shown volatility, initially gaining due to safe-haven buying linked to geopolitical events but later losing ground due to disappointing economic data. The dollar's performance is closely tied to the Euro, which has weakened following softer inflation data from the Eurozone.

Focus on Labor Market

Traders are keenly awaiting the NFP report, which is critical for assessing the labor market's health and potential Fed policy shifts. The report's outcome could influence expectations for future rate cuts, with gold, silver, and stocks currently trading at or near all-time highs, driven by anticipated dovish moves from the Fed.

Technical Analysis

Technically, the DXY has tested key moving averages, piercing the 200-day moving average at 98.873 but failing to maintain momentum above the 50% resistance level at 99.027. A sustained move above these averages could indicate buyer strength, while bearish traders are eyeing a target of 98.307 if the NFP report disappoints.

Fed Officials' Concerns

Recent comments from Fed officials suggest a growing concern about the economy's trajectory, with calls for careful adjustments to interest rates based on incoming data. This sentiment could contribute to a bearish outlook for the dollar if economic conditions worsen.

Conclusion

As the market prepares for the NFP report, the US Dollar stands at a critical juncture. With a high probability of no rate cuts priced in, any significant deviation in the labor market data could lead to substantial volatility in the dollar's value.