- Following better-than-expected non-farm payroll (NFP) data for June, expectations for interest rate hikes and cuts have eased regarding the US dollar.
- The US economy added 147,000 jobs in June, while the unemployment rate unexpectedly dropped to 4.1%.
- While the US-Vietnam trade deal has eased some tensions, negotiations continue ahead of the July 9 deadline.
The US dollar (USD) made gains on Thursday as positive NFP data from June alleviated concerns surrounding the job market. The strong report helped the dollar rebound from its recent lows as traders reconsidered the likelihood of the Federal Reserve reducing rates in July.
The US Dollar Index (DXY), which measures the dollar against six major currencies, moved close to 97.00 during US trading hours, marking a recovery from prior weaknesses and breaking a streak of losses over multiple days. This rebound followed a disappointing ADP employment change report released on Wednesday, which had initially sparked dovish expectations. However, the strong NFP figures provided stability for the dollar and lowered speculation about immediate rate cuts from the Fed.
The latest NFP report showed 147,000 jobs added in June, which slightly outperformed the 144,000 jobs added in May. Surprisingly, the unemployment rate fell to 4.1% from 4.2% in May, contrary to expectations that it might rise to 4.3%.
Despite this cautious optimism, the US dollar has dropped over 10% in the past six months. Broader economic uncertainties and policy-related pressures continue to undermine confidence in the dollar. Proposed tariffs from President Trump and ongoing worries about fiscal vulnerabilities further strain investor sentiment. Consequently, concerns about long-term economic stability and rising government expenditures dampen demand for the greenback.
- In light of the upcoming July 9 tariff deadline, a new trade agreement between the US and Vietnam has alleviated some investor anxiety. The US agreed to reduce tariff pressures in exchange for greater access for American goods in Vietnam, which involves a 20% obligation on exports and a 40% duty on imports rerouted through Vietnam from third countries, notably China. In response, Vietnam will ease barriers on select US products, allowing certain entries to be tax-free, which is a softer approach than the initially proposed blanket tariff rate of 46%.
- While the US-Vietnam deal tempers fears in various markets, its broader impact remains uncertain. According to Charu Chanana from Saxo, the agreement is predominantly positive, but the 20% tariff is more aggressive than anticipated, outpacing the 10% baseline. She noted that the critical point will be how China reacts, as the plan seems to target transshipment goods with a higher 40% tariff rate.
- As the July 9 deadline approaches, the US is pressuring key allies, like Japan, South Korea, and the European Union, to finalize trade agreements or face tariffs on 50% of certain imports. While some negotiations have advanced, others remain challenging. Japan has firmly resisted, with Prime Minister Isbaiba stating that Tokyo intends to “protect national interests at all costs.” South Korean President Lee Jae Myung acknowledged that negotiations are proving difficult and while it’s uncertain if they will conclude by next Tuesday, German officials are advocating for prompt action to prevent disruptions in vital export sectors. The looming tariff threat adds to global trade unrest, maintaining market volatility.
- Trade relations with China show signs of improvement as Washington lifted significant export restrictions on chip design software and ethane shipping. US firms like Synopsys, Cadence, and Siemens can now resume selling electronic design automation tools to Chinese customers, and the easing of licensing rules on ethane exports may facilitate trade flows that had stagnated in June. This policy shift indicates a step towards normalization after China eased restrictions on rare earth exports. Although deeper issues remain, these recent moves offer some optimism in US-China relations.
- Back home, a significant tax and spending bill passed through key procedures but faces uncertainty as divisions within the Republican Party widen. It narrowly cleared a 219-213 vote. Some GOP members have voiced concerns over deep spending cuts and rising obstacles, which may pose challenges ahead of the November elections. Despite President Trump’s strong push for rapid passage to meet a voluntary July 4 deadline, dissent from fiscal conservatives could delay the bill’s approval. Currently, the House is still deliberating, and investors are closely monitoring these developments due to federal debt levels and potential impacts on market sentiment.
- The yield on US 10-year Treasury bonds rose to 4.34% on Thursday, increasing nearly 6 basis points following the encouraging employment report.
- Alongside the robust NFP release, weekly unemployment claims decreased to 233,000, hitting a six-week low and falling below the anticipated 240,000, demonstrating ongoing strength in the labor market. Additionally, average hourly earnings grew by 0.2% in June, slightly below the forecast of 0.3%, which may soften wage pressure. This miss on revenue alleviates some inflation concerns, yet the overall strength of employment data diminishes the urgency for Fed rate cuts in July, thus supporting the US dollar.
- Looking ahead, attention is focused on the ISM Services Purchasing Managers Index (PMI), which is set for release later on Thursday. Markets anticipate slight improvements in service sector activity, with projections suggesting a figure just over 50, around 50.5. Stronger than expected results could bolster confidence in the US economic outlook and further support the dollar.
Technical Analysis: DXY faces challenges near significant resistance following wedge failure
The Dollar Index (DXY) recently fell below a downward wedge pattern. After this failure, the index is currently locked in a narrow range between approximately 96.40 and 97.15, indicating a temporary pause in selling. It seems to be attempting a mild rebound as it tests the lower boundary of the broken wedge around 96.80-97.00. This zone, which once served as support, is now acting as resistance. The index remains under the 9-day exponential moving average of 97.25, reinforcing its bearish outlook unless buyers can recover that level with significant momentum.
Momentum indicators suggest further integration. The relative strength index (RSI) stands near 31.49, indicating weak momentum that has eased slightly from oversold levels. Meanwhile, the rate of change (ROC) at -1.98 remains negative, albeit stabilized alongside the price’s lateral movement. In summary, the US dollar index is in a phase of attempting recovery following a breakdown; however, without strong catalysts and continued bullish activity, the risks still lean towards the downside. A decisive drop below 96.60 could reignite the downtrend, whereas a close above 97.25 could indicate short-term stabilization.
