Dollar Breaking Out of a Wedge Ahead of US PCE: Technical Breakout as a Precursor to Macro Policy Shifts and Carry Trade Rebalancing

The U.S. Dollar Index (DXY) has recently broken below a key wedge pattern, signaling a potential shift in the greenback's trajectory ahead of the upcoming Personal Consumption Expenditures (PCE) inflation report. This technical development, coupled with evolving macroeconomic dynamics and carry trade adjustments, underscores a critical juncture for global markets. As the Federal Reserve prepares to assess inflationary pressures, the interplay between technical signals and policy expectations is reshaping currency flows and risk appetite.

Technical Breakout and Market Sentiment

The DXY's breach of a wedge pattern-a classic bearish reversal-has intensified speculation about the dollar's near-term weakness. A wedge pattern, characterized by converging trendlines, often signals exhaustion in a trend when broken. In this case, the breakdown below the pattern's lower boundary suggests further downward momentum, particularly if the PCE data, a key Fed policy barometer, comes in below expectations.

Meanwhile, the EUR/USD pair has shown constructive bias following a breakout and retest of a falling-wedge pattern. Prices have consolidated near key support levels, hinting at a potential upward move if the wedge's validity holds. Conversely, gold has formed a rising wedge, with narrowing price channels and diverging momentum indicators pointing to bearish pressure. This divergence between fiat and hard assets highlights the market's mixed signals ahead of the PCE release.

PCE Data and Policy Implications

The PCE report, scheduled for release in late November 2025, is pivotal for the Fed's rate decision calculus. Current market expectations, as reflected in the CME FedWatch tool, assign an 87% probability of a 25-basis-point rate cut in December 2025. A weaker-than-expected PCE reading-particularly if headline inflation dips below 2.8% year-over-year-could accelerate the case for further easing, reinforcing the dollar's technical bearishness.

Historical precedents suggest that PCE data has frequently influenced Fed policy. For instance, the September 2025 PCE report, which showed headline inflation at 2.8% and core PCE at 2.9%, slightly exceeded the Fed's 2% target but still left room for a rate cut. The 30-year Treasury yield's approach to a key breakout also reflects market pricing of a Fed pivot, with the yield curve steepening as investors anticipate lower long-term rates.

Carry Trade Rebalancing and Macro Shifts

The dollar's technical weakness is compounding shifts in carry trade strategies. Traditionally, the U.S. dollar has served as a funding currency in carry trades, where investors borrow in low-yield currencies like the yen or Swiss franc to invest in higher-yielding assets. However, the yen's recent rebound-driven by the Bank of Japan's cautious normalization and U.S.-China trade tensions-has made such strategies less favorable.

Emerging markets (EM) have emerged as beneficiaries of this rebalancing. EM macro hedge funds outperformed in 2025, fueled by a weaker dollar, higher real yields, and improved fiscal positions in key economies. The dollar's technical breakdown has also spurred a "local-carry" narrative, where EM central banks are expected to cut rates selectively in H2 2025, preserving inflation control while supporting growth.

Conversely, the unwinding of Japanese carry trades-once a $20 trillion pillar of global markets-has introduced volatility. Rising Japanese government bond yields have pressured investors who borrowed at near-zero rates to invest in riskier assets, triggering a sell-off in equities and commodities. This dynamic underscores the fragility of carry trades in a world where policy surprises and geopolitical risks dominate.

Historical Context and Policy Correlations

Historical analysis reveals a recurring pattern: USD wedge breakouts often precede Fed policy shifts tied to PCE data. For example, the 2019 and 2020 rate cuts were closely linked to PCE readings that signaled economic uncertainty. Similarly, the current wedge breakdown in DXY aligns with dovish Fed expectations and weak labor data, which have already pushed USD/JPY to two-week lows.

The breakdown of traditional correlations-such as USD/JPY's historical link to U.S. Treasury yields and risk appetite-further complicates the picture. Political uncertainties, including U.S. fiscal policy debates and potential Fed leadership changes, have increasingly driven price action, overshadowing technical and macroeconomic fundamentals.

Conclusion: Navigating the Crossroads

The dollar's wedge breakout ahead of the PCE report is more than a technical signal-it is a harbinger of broader macroeconomic and policy shifts. Investors must weigh the likelihood of a Fed rate cut against the evolving carry trade landscape, where EM assets and yen dynamics play pivotal roles. As the PCE data approaches, the interplay between technical patterns and policy outcomes will remain a critical determinant of currency flows and risk allocations.