US Dollar Outlook Hinges on July Inflation Data after Gangbuster Jobs Report
US DOLLAR WEEKLY FORCAST: MIDLY BULLISH
- The U.S. dollar rallies before the weekend after U.S. labor market data surprises to the upside, helping dispel recession fears
- Strong job growth is and high wage pressures in the U.S. economy are likely to prevent a monetary policy pivot by the Federal Reserve, creating a positive backdrop for the greenback
- July U.S. inflation data will steal the spotlight next week
Trade Smarter - Sign up for the DailyFX Newsletter
Receive timely and compelling market commentary from the DailyFX team
Most Read: GBP/USD Weekly Forecast - BoE Expects a Recession, Sterling Breakdown
After a soft end in July, the U.S. dollar, measured by the DXY index, rallied in the first week of August, up about 0.7% to 106.55, with most gains coming on Friday just before the weekend after U.S. employment data surprised to the upside, removing any hopes of a Fed pivot later this year.
For context, the U.S. employers added 528,000 workers in July, more than twice consensus estimates and the fastest pace of job growth since February, signaling that hiring remains strong and that recession fears may be overblown.
With the labor market still firing on all cylinders, no signs of widespread layoffs and wage pressures failing to moderate, the U.S. central bank is likely to stay the course, raising borrowing costs forcefully in the coming months to cool demand and curb inflation. This situation may bolster U.S. Treasury yields as investors price in a steeper hiking path and higher-for-longer interest rates.
In the current environment, the U.S. dollar may stay supported and even gain more ground against low-yielding currencies, such as the Japanese yen and euro in the near term. However, there is one variable to keep in mind that could potentially bring the greenback down: consumer price data.
We will get a better picture of the inflation profile next week when the U.S. Bureau of Labor Statistics publishes the latest consumer price index results. According to a Bloomberg News survey, July CPI rose 0.3% m-o-m, bringing the annual rate to 8.7% from 9.1% in June, a welcome directional improvement, but still an extremely high reading, more than four times above the central bank's 2% target.
For markets to start discounting a less aggressive FOMC tightening cycle and lower terminal rate, inflation would need to come down meaningfully. This may not happen yet in the July report despite falling energy costs since late June. Against this backdrop, the fundamental forecast for the DXY index is mildly bullish for the week ahead.
US DOLLAR (DXY) DAILY CHART
DXY Chart Prepared Using TradingView
EDUCATION TOOLS FOR TRADERS
- Are you just getting started? Download the beginners’ guide for FX traders
- Would you like to know more about your trading personality? Take the DailyFX quiz and find out
- IG's client positioning data provides valuable information on market sentiment. Get your free guide on how to use this powerful trading indicator here.
---Written by Diego Colman, Market Strategist for DailyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.