Thursday, July 31st Update
The US Dollar (USD) has seen a slight correction today after experiencing a strong rally against its competitors on Wednesday. This strength was supported by solid economic data and a cautious approach from the Federal Reserve regarding its monetary policy. Today’s economic calendar for Europe includes inflation figures from Germany for July and the unemployment rate for the Eurozone from June. Later in the day, traders will keep a close eye on the US for weekly initial unemployment claims and personal consumption expenditures (PCE) price index data.
This Week’s USD Performance
The table below illustrates how the US dollar has changed in value against selected currencies this week, with the USD showing particular strength against the euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 2.66% | 1.15% | 0.65% | 0.76% | 1.54% | 1.32% | 1.79% | |
| EUR | -2.66% | -1.49% | -1.91% | -1.85% | -1.09% | -1.30% | -0.85% | |
| GBP | -1.15% | 1.49% | -0.61% | -0.36% | 0.41% | 0.20% | 0.65% | |
| JPY | -0.65% | 1.91% | 0.61% | 0.12% | 0.85% | 0.65% | 1.28% | |
| CAD | -0.76% | 1.85% | 0.36% | -0.12% | 0.75% | 0.56% | 1.01% | |
| AUD | -1.54% | 1.09% | -0.41% | -0.85% | -0.75% | -0.21% | 0.22% | |
| NZD | -1.32% | 1.30% | -0.20% | -0.65% | -0.56% | 0.21% | 0.45% | |
| CHF | -1.79% | 0.85% | -0.65% | -1.28% | -1.01% | -0.22% | -0.45% |
This heatmap illustrates how the major currencies are performing against one another. The left column indicates the base currency while the top row indicates the estimated currency. For example, if you look at the USD against the JPY, the value in that box represents the rate change for USD (base) to JPY (quote).
The USD index increased by 1% on Wednesday, reaching its highest point in two months, close to 100.00. According to preliminary estimates from the U.S. Bureau of Economic Analysis, the GDP increased by 3% annually in the second quarter, surpassing expectations of a 2.4% growth after a 0.5% drop in the previous quarter. Additionally, July figures from Automatic Data Processing (ADP) revealed a rise in private sector jobs by 104,000, well above the forecast of 78,000.
Later that day, the Federal Reserve decided to keep its policy rate steady in the 4.25%-4.5% range. The meeting’s policy statement indicated support from Gov. Christopher Waller and Gov. Michelle Bowman for a 25 basis point rate cut. At a subsequent press briefing, Fed Chairman Jerome Powell refrained from confirming any anticipated rate cuts in September, citing uncertainties regarding inflation trends. He acknowledged that current measures are somewhat restrictive, but not detrimental to the economy.
The Bank of Japan (BOJ) announced today it is holding its short-term interest rate targets steady between 0.40%-0.50%, as expected. In its policy statement, the BOJ mentioned ongoing uncertainty about trade policies and their potential economic implications, stating that rate hikes would follow the forecast if conditions evolve as expected. After hitting a high of over 149.50 on Wednesday, the USD/JPY is now trading below 149.00.
The USD/CAD saw an increase of about 0.5% on Wednesday, marking five consecutive days of positive movement. The Bank of Canada (BOC) is maintaining its policy rate at 2.75%, with Governor Tif McClem emphasizing that tariff issues will not contribute to inflation concerns. Early Thursday, the USD/CAD is slightly down but remains above 1.3800.
Meanwhile, the EUR/USD fell by more than 1% on Wednesday, dropping to around 1.1400 but has since recovered and is trading near 1.1450 in the European morning.
Following a brief increase early Wednesday, gold prices slipped later in the day to a new monthly low of below $3,270, pressured by rising US Treasury yields. Currently, XAU/USD is gaining traction, trading just above $3,300 in the European session.
FAQ: Federal Reserve Policies
The US monetary policy is largely influenced by the Federal Reserve System, which aims to ensure price stability and foster full employment. Adjusting interest rates is the primary tool used to meet these goals. When inflation accelerates beyond the Fed’s 2% target, rates are typically increased, making the USD a more attractive investment. Conversely, if inflation falls below 2% or if unemployment is excessively high, the Fed may opt to decrease rates to stimulate borrowing.
The Fed holds eight policy meetings each year, during which the Federal Open Market Committee (FOMC) analyzes economic conditions and makes policy decisions. This committee comprises 12 federal officials, including seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Regional Reserve Bank presidents, who serve on a rotating basis for one-year terms.
In rare cases, the Federal Reserve may employ Quantitative Easing (QE), a strategy that significantly increases credit availability within the financial system during crises or low inflation periods. This approach was notably used during the 2008 financial crisis when the Fed expanded the money supply to purchase high-quality bonds, which typically weakens the USD.
On the other hand, Quantitative Tightening (QT) refers to the opposite of QE, where the Fed stops purchasing bonds and allows existing bond holdings to mature without reinvesting to buy new ones. QT is usually viewed positively for the value of the USD.
