- The US dollar strengthened for the second consecutive day on Friday, buoyed by solid economic data and improved trade sentiment.
- Market participants remain cautious as they await next week’s Federal Reserve decision and the upcoming August 1 tariff deadline.
- After showing strong support around the psychological threshold of 97.00, the DXY US Dollar Index is expected to hover near 97.80.
The US dollar (USD) exhibited strong trading on Friday, continuing a rally fueled by optimistic economic data and trade developments. New claims for unemployment benefits and steady purchase manager index (PMI) figures released on Thursday eased fears of a recession, suggesting that the US economy is still holding up well. Concurrently, progress in tariff negotiations with countries like Japan, Indonesia, and the Philippines has bolstered risk sentiment, alleviating some downward pressure on the dollar.
The US Dollar Index (DXY), which tracks the dollar against a basket of six major currencies, showed a measured recovery during US market hours on Friday, rebounding from a two-week low experienced earlier in the week. As of this writing, the index is around 97.77. Even so, it’s poised to end a two-week run of gains and appears to struggle past the 98.00 threshold. With the August 1 tariff deadline and the Federal Reserve’s monetary policy decision on the horizon, traders seem to be holding back, which is limiting significant movement in the currency.
On Thursday, President Donald Trump made headlines during a visit to the Federal Reserve’s headquarters in Washington. He toured a $2.5 billion renovation project alongside Federal Reserve Chairman Jerome Powell and Senator Tim Scott. Trump noted that the costs had ballooned to $3.1 billion, which Powell quickly refuted, clarifying that previous estimates did not indicate overruns.
Trump also criticized the central bank, claiming it was “moving too slowly” in cutting interest rates to support economic growth. However, he stated that there are currently “no plans” to remove Powell from his position. This visit, while seemingly a simple tour, carried political implications and reignited discussions about the independence of the Fed.
On Friday, Trump informed reporters that his meeting with Powell was positive and suggested Powell was inclined to lower interest rates. This comment fueled speculation about increasing political pressure on central banks, especially with the Fed meeting coming up shortly. Markets are keenly observing central bank responses to these rising pressures.
The Federal Reserve is set to announce its policy decision on Wednesday, with expectations that interest rates will remain unchanged, possibly adjusting later in September. According to a recent Reuters survey, all economists surveyed anticipate the Fed will maintain its benchmark rate in the 4.25%-4.50% range next week.
Market Movements: Pre-Fed Decisions and Trade Timelines
- On Friday, Trump indicated that “most trade transactions have concluded,” mentioning that many agreements have been formalized with tariff rates of 10% to 15%. He noted a “50-50 chance” of reaching a deal with the European Union, despite suggestions from EU diplomats for rapid agreements. European Commission President Ursula von der Leyen announced a meeting with Trump on Sunday to discuss trade relations, describing earlier conversations as “good.” The aim will be to secure strong trade ties between the US and EU.
- Trump’s tone remained firm regarding Canada, expressing skepticism about trade progress and hinting at the possibility of imposing unilateral tariffs without further negotiation. “There’s really not much to negotiate,” he remarked.
- US durable goods orders plummeted 9.3% in June to $311.84 billion, following a notable 16.5% rise in May. The drop was less than the anticipated 10.8%, largely influenced by decreased commercial aircraft bookings. Excluding transportation, orders increased by 0.2%, demonstrating some resilience in manufacturing demand, but core capital goods orders fell by 0.7%.
- The yield on the 10-year Treasury bond stabilized around 4.39% on Friday after a tumultuous week as investors analyzed the upcoming Federal Reserve Policy Conference. Current market expectations are for an interest rate cut of 43 basis points by the end of 2025, especially looking at potential cuts in September and December. Stable yields suggest current inflation expectations and the impact of tariffs amidst uncertainty about the direction of monetary policy.
- To date, the US has established five trade agreements with key partners, including Japan, the Philippines, Vietnam, Indonesia, and the UK, while also engaging in discussions with China. Negotiations with the EU, South Korea, and India continue as key partners race to finalize agreements ahead of the August 1 tariff deadline. The EU is advocating for transaction frameworks similar to US deals, aiming to avoid a 30% tax and seeking baseline duties and exemptions for critical sectors like automobiles and pharmaceuticals. Trump indicated a “50-50 chance” of a trade agreement with the EU.
- On Friday, South Korean Industry Minister Kim Jong Kwan and trade representative Yo Han Ku met with Commerce Secretary Howard Lutnick in Washington, entering final discussions. Seoul has proposed a $100 billion investment package from major companies like Samsung and Hyundai to secure agreements and evade a potential 25% tariff on main exports.
- President Trump arrived in Scotland on Friday for a blend of business and diplomatic engagements. He is slated to meet with British Prime Minister Kielstarme on Monday, where trade and tariff discussions will likely be central. Current US tariffs affect key UK exports such as steel, whiskey, and pharmaceuticals and may lead to revised trade agreements.
- On Wednesday, Trump reiterated his tough stance on trade, suggesting future tariffs on US trading partners could range from 15% to 50%, moving up from a previous 10% baseline. He made it clear that tariff relief would only be offered to countries committed to fully opening their markets to American goods and services, while full punitive tariffs would apply to those unwilling to engage in mutual trade.
- Diverging views among Federal Reserve officials may spark discussions regarding interest rate decisions for July. Voices in favor of a 25 basis points cut include Gov. Christopher Waller and Vice Chairman Michelle Bowman, contrasting with Fed Chairman Jerome Powell and most officials who prefer a more cautious strategy. They warn that early cuts could lead to renewed inflationary pressures if tariff-related inflation becomes more persistent than anticipated.
Technical Analysis: DXY Stabilizes Near 97.00
The US Dollar Index (DXY) climbed on Friday, recovering after successfully testing the upper limit of a downward wedge pattern that was decisively broken earlier. The DXY found significant support at the 97.00 mark on Thursday, with buyers stepping in to push back and reignite bullish momentum.
The price action appears strong, with initial major hurdles falling around the 97.80-98.00 area. This level previously served as support and coincides with the 21-day exponential moving average (EMA), now acting as resistance. A sustained break above this area could open the door for a potential retest of last week’s high at 98.93, along with a 50-day EMA resistance at 98.52.
On the downside, a daily close below 97.00 could undermine the bullish correction structure and indicate a wave of renewed selling pressure, potentially bringing the index back down to the lower wedge boundary or even revisiting its multi-year low of 96.38 set on July 1.
The 14-day relative strength index (RSI) is currently trending upwards at 47, indicating a slight recovery from recent lows. However, it’s still below the neutral 50 mark, suggesting that bullish momentum remains tentative.
