The dollar rose to a two-month high as the Federal Reserve's hawkish stance and economic data boosted market confidence
2025-07-31 18:37:31
On Thursday (July 31), the US dollar hit a two-month high, with the US dollar index (DXY) holding steady above 99.50, approaching the psychological level of 100.00. It has risen nearly 3% in the past five days and is expected to achieve its first positive monthly performance this year.
The Fed's hawkish stance caused market turmoil
On Wednesday, the Federal Reserve held the federal funds rate steady at 4.50%, as expected. Powell struck a cautious tone at the Federal Open Market Committee (FOMC) press conference, offering little clear forward guidance. He noted that inflation remains uneven and labor market indicators are still adjusting, and emphasized the need for more time to assess the economic impact of the Trump administration's tariff policies.
The hawkish remarks dampened market expectations for a September rate cut. According to the CME FedWatch tool, the probability of a September rate cut fell to 46% from 65% on Tuesday, and the December rate cut is expected to be 35 basis points.
Guillermo Alcala, a foreign exchange strategist at ING Bank, said: "The rise of the US dollar is in line with our previous forecast. The strong GDP data and the independent stance of the Federal Reserve on political pressure further support the dollar, and the rise is expected to continue in the short term."
Economic data is mixed, but the labor market remains resilient
US economic data released on Wednesday presented a mixed picture. ADP non-farm payrolls change data showed 104,000 new jobs added in July, exceeding expectations of 77,000, demonstrating the resilience of the labor market amid broader economic concerns. Initial jobless claims recently declined for six consecutive weeks, the longest such streak since August 2022, further strengthening market confidence in the labor market. Furthermore, the second-quarter GDP preview unexpectedly rose to 3.0%, exceeding expectations by 2.5%, reflecting strong economic growth momentum.
However, the GDP price index was 2.0%, slightly lower than the expected 2.2%, suggesting that inflationary pressures have eased. The housing market showed signs of weakness, with pending home sales falling 0.8% month-on-month, reversing the previous 1.8% increase.
China Merchants Bank's Financial Markets Department noted that despite doubts about the details of July's economic data, the overall performance was solid. If Friday's non-farm payroll data does not exacerbate market concerns, the focus may shift to inflationary pressures caused by tariffs.
ING Bank predicts that December may be the starting point for the Fed to cut interest rates, but if signs of weak employment and GDP growth intensify, the rate cut may be as much as 50 basis points.
Key data preview: PCE and non-farm payrolls attract much attention
The market is focusing on the core PCE price index and the employment cost index today, with the former expected to rise by 0.3% month-over-month and the latter by 0.8%. ING estimates that the core PCE may have increased by 0.46% month-over-month in June, exceeding the market expectation of 0.3%. If the data exceeds expectations, it may further push up the US dollar.
In addition, initial jobless claims are expected to rise slightly from 217,000 to 222,000, providing forward guidance for Friday's non-farm payroll report.
Friday's non-farm payroll data is highly anticipated, with job creation projected to fall from 147,000 to 106,000, and the unemployment rate to rise from 4.1% to 4.2%. Average hourly earnings are expected to rise by 0.3%, which could impact inflation expectations. The ISM Manufacturing PMI is expected to come in at 49.5, indicating continued contraction in the manufacturing sector, while the University of Michigan Consumer Sentiment Index is expected to rise from 61.8 to 70.0, raising questions about potential upward revisions.
The US dollar retreated slightly ahead of the PCE data release, but overall bullish sentiment remained intact. Market consensus is for headline inflation to rise to 2.5% from 2.3%, while core PCE is expected to remain stable at 2.7%. Analysts warn that if inflation data exceeds expectations, the Federal Reserve may maintain a hawkish stance, potentially extending the dollar's gains.
Technical Analysis
The US dollar index is approaching a new high of 100 during the session, which provides confidence to the bulls and the next few days will be particularly important.
(Source of US Dollar Index daily chart: Yihuitong)
On the US Dollar Index, the big question is whether we can see support hold above the previous resistance level of 98.98, which was a new high set two weeks ago after the CPI release and reappeared yesterday. This support is likely to occur if the final core personal consumption expenditure data is lower than expected.
The support level above this is $99.40, which served as resistance before the Federal Reserve (FOMC) press conference and also served as resistance three times in June this year.
In terms of resistance, the next important level is the psychological level of 100.00. Above this, resistance is seen at the previous highs of 100.55 and 101.27.
The Fed's hawkish stance caused market turmoil
On Wednesday, the Federal Reserve held the federal funds rate steady at 4.50%, as expected. Powell struck a cautious tone at the Federal Open Market Committee (FOMC) press conference, offering little clear forward guidance. He noted that inflation remains uneven and labor market indicators are still adjusting, and emphasized the need for more time to assess the economic impact of the Trump administration's tariff policies.
The hawkish remarks dampened market expectations for a September rate cut. According to the CME FedWatch tool, the probability of a September rate cut fell to 46% from 65% on Tuesday, and the December rate cut is expected to be 35 basis points.
Guillermo Alcala, a foreign exchange strategist at ING Bank, said: "The rise of the US dollar is in line with our previous forecast. The strong GDP data and the independent stance of the Federal Reserve on political pressure further support the dollar, and the rise is expected to continue in the short term."
Economic data is mixed, but the labor market remains resilient
US economic data released on Wednesday presented a mixed picture. ADP non-farm payrolls change data showed 104,000 new jobs added in July, exceeding expectations of 77,000, demonstrating the resilience of the labor market amid broader economic concerns. Initial jobless claims recently declined for six consecutive weeks, the longest such streak since August 2022, further strengthening market confidence in the labor market. Furthermore, the second-quarter GDP preview unexpectedly rose to 3.0%, exceeding expectations by 2.5%, reflecting strong economic growth momentum.
However, the GDP price index was 2.0%, slightly lower than the expected 2.2%, suggesting that inflationary pressures have eased. The housing market showed signs of weakness, with pending home sales falling 0.8% month-on-month, reversing the previous 1.8% increase.
China Merchants Bank's Financial Markets Department noted that despite doubts about the details of July's economic data, the overall performance was solid. If Friday's non-farm payroll data does not exacerbate market concerns, the focus may shift to inflationary pressures caused by tariffs.
ING Bank predicts that December may be the starting point for the Fed to cut interest rates, but if signs of weak employment and GDP growth intensify, the rate cut may be as much as 50 basis points.
Key data preview: PCE and non-farm payrolls attract much attention
The market is focusing on the core PCE price index and the employment cost index today, with the former expected to rise by 0.3% month-over-month and the latter by 0.8%. ING estimates that the core PCE may have increased by 0.46% month-over-month in June, exceeding the market expectation of 0.3%. If the data exceeds expectations, it may further push up the US dollar.
In addition, initial jobless claims are expected to rise slightly from 217,000 to 222,000, providing forward guidance for Friday's non-farm payroll report.
Friday's non-farm payroll data is highly anticipated, with job creation projected to fall from 147,000 to 106,000, and the unemployment rate to rise from 4.1% to 4.2%. Average hourly earnings are expected to rise by 0.3%, which could impact inflation expectations. The ISM Manufacturing PMI is expected to come in at 49.5, indicating continued contraction in the manufacturing sector, while the University of Michigan Consumer Sentiment Index is expected to rise from 61.8 to 70.0, raising questions about potential upward revisions.
The US dollar retreated slightly ahead of the PCE data release, but overall bullish sentiment remained intact. Market consensus is for headline inflation to rise to 2.5% from 2.3%, while core PCE is expected to remain stable at 2.7%. Analysts warn that if inflation data exceeds expectations, the Federal Reserve may maintain a hawkish stance, potentially extending the dollar's gains.
Technical Analysis
The US dollar index is approaching a new high of 100 during the session, which provides confidence to the bulls and the next few days will be particularly important.
(Source of US Dollar Index daily chart: Yihuitong)
On the US Dollar Index, the big question is whether we can see support hold above the previous resistance level of 98.98, which was a new high set two weeks ago after the CPI release and reappeared yesterday. This support is likely to occur if the final core personal consumption expenditure data is lower than expected.
The support level above this is $99.40, which served as resistance before the Federal Reserve (FOMC) press conference and also served as resistance three times in June this year.
In terms of resistance, the next important level is the psychological level of 100.00. Above this, resistance is seen at the previous highs of 100.55 and 101.27.
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