US Dollar Outlook Hinges on July Inflation Data after Gangbuster Jobs Report



  • The U.S. greenback rallies earlier than the weekend after U.S. labor market information surprises to the upside, serving to dispel recession fears
  • Strong job development is and excessive wage pressures within the U.S. economic system are prone to stop a financial coverage pivot by the Federal Reserve, making a constructive backdrop for the buck
  • July U.S. inflation information will steal the highlight subsequent week

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After a comfortable finish in July, the U.S. greenback, measured by the DXY index, rallied within the first week of August, up about 0.7% to 106.55, with most good points coming on Friday simply earlier than the weekend after U.S. employment information stunned to the upside, eradicating any hopes of a Fed pivot later this 12 months.

For context, the U.S. employers added 528,000 staff in July, greater than twice consensus estimates and the quickest tempo of job development since February, signaling that hiring stays sturdy and that recession fears could also be overblown.

With the labor market nonetheless firing on all cylinders, no indicators of widespread layoffs and wage pressures failing to average, the U.S. central financial institution is prone to keep the course, elevating borrowing prices forcefully within the coming months to chill demand and curb inflation. This scenario could bolster U.S. Treasury yields as buyers value in a steeper climbing path and higher-for-longer rates of interest.

In the present atmosphere, the U.S. greenback could keep supported and even acquire extra floor in opposition to low-yielding currencies, such because the Japanese yen and euro within the close to time period. However, there may be one variable to needless to say may doubtlessly deliver the buck down: client value information.

We will get a greater image of the inflation profile subsequent week when the U.S. Bureau of Labor Statistics publishes the newest client value index outcomes. According to a Bloomberg News survey, July CPI rose 0.3% m-o-m, bringing the annual charge to eight.7% from 9.1% in June, a welcome directional enchancment, however nonetheless a particularly excessive studying, greater than 4 instances above the central financial institution’s 2% goal.

For markets to begin discounting a much less aggressive FOMC tightening cycle and decrease terminal charge, inflation would want to return down meaningfully. This could not occur but within the July report regardless of falling power prices since late June. Against this backdrop, the basic forecast for the DXY index is mildly bullish for the week forward.


DXY Chart Prepared Using TradingView


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—Written by Diego Colman, Market Strategist for DailyFX

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