The dollar faced losses in recent days as traders scaled back expectations for Federal Reserve rate hikes, keeping focus on the upcoming jobs report on 7 August.
Geopolitical tensions and inflation data weighed on the greenback. News on 6 August that Iran and Oman agreed to establish a shipping corridor through the Strait of Hormuz boosted appetite for risk in markets and hit oil prices. Traders anticipate a lull in hostilities this month and possible negotiations between the United States and Iran.
Headline inflation in the United States has risen less than some had feared around the end of the first quarter. June’s annual figure was significantly below expectations. According to CME FedWatch, around 45 percent of traders expect a single hike between now and the end of 2026. The probability of a hike next month declined to about 55 percent in the last week.
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July’s non-farm payrolls (NFP) with data for June was significantly weaker than expected but still not a negative number: 57,000 jobs was only around half the consensus. This was somewhat negative for the dollar, although it’s usually rare to see a single NFP have a lasting effect beyond a few days. The figure was still considerably better than the 12-month average. Unemployment unexpectedly declined in June. It’s too early to say for sure whether this is the start of a downward trend in unemployment, but for now this seems to be unlikely since the rate is relatively low and less positive economic conditions overall don’t suggest a significantly better job market.
Decent but not spectacular performance from American GDP and the labour market while inflation hasn’t surged enormously mean that the Fed doesn’t seem to be under a lot of pressure to hike rates immediately. Political pressure on the Fed to cut rates hasn’t been in clear view recently but remains a factor to consider.
A significantly better result from the NFP for July would normally suggest that inflation might be higher than current expectations of 3.4 percent for the annual headline figure. However, energy is likely to be a key factor in 12 August’s inflation, possibly influencing a higher reading given that oil made an overall gain last month. Stronger results from the NFP and inflation might increase the probability of the Fed hiking twice before the end of the year and boost the dollar.
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Euro-dollar has bounced since late last month as the most hawkish possibilities for the Fed by the end of the year seem to have been rejected for now and the intensity of the conflict in the Gulf declined. The 100 SMA slightly below $1.157 seems to be the main dynamic resistance in view ahead of a possible test of the 23.6 percent weekly Fibonacci retracement near $1.16. However, the slow stochastic clearly signals buying saturation, so an immediate reaction upward if the NFP is negative might be short-lived. A better NFP broadly in line with expectations might drive the price down to retest $1.15 at least in the short term.
Further ahead, stronger results from both the NFP and American inflation on 12 August might drive the price down to the confluence of the 20 and 50 SMAs around $1.145. The golden cross of these can probably be discounted in the context of major American data coming up.
Dollar-yen is holding above ¥157. After the largest intervention in decades from both the American and Japanese governments, dollar-yen now seems to have stabilised around ¥157.50. According to official data, Japan spent more than ¥5 trillion on 31 July shoring up the yen in addition to American operations earlier last week. Below target inflation and lacklustre GDP growth in Japan in recent months make more hikes by the BoJ in the next few months questionable. However, lower expectations for the Fed to hike twice before the end of the year might delay the next push up to ¥160.
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The lack of major change in basic fundamentals and spike in buying around the interventions last week might suggest that the general uptrend could continue although perhaps with less momentum than earlier this summer. ¥160 remains an obvious potential target but both the 200 and 100 SMAs are potential dynamic resistances before there. Strong oversold signals from both the slow stochastic and Bollinger Bands suggest an ongoing bounce. 3 August’s large tail showed a clear rejection of a move below ¥157. Another serious attempt to push below there would probably need a weaker NFP and possible lower inflation next week too. However, immediate further intervention, however unlikely that might seem, could invalidate this analysis, so traders should continue to watch for further such operations as before.
While market participants are currently betting on a single Fed rate hike for the remainder of the year, the resilience of the dollar against the yen and the mixed nature of recent inflation data suggest that the path ahead remains volatile. A stronger-than-expected jobs report could rapidly shift market sentiment, potentially forcing a reassessment of Fed policy and triggering a swift reversal in currency pairs that have recently trended in one direction.