US DOLLAR WEEKLY FORCAST: MIDLY BULLISH
- The U.S. dollar[1] 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
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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[3], 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[4] and euro[5] in the near term. However, there is one variable to keep in mind that could potentially bring the greenback down: consumer price data.
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