The dollar has strengthened following the surprise win of the left-wing alliance in the French second-round legislative elections, which caused European currencies to drop. This has led to some safe-haven demand, with the Japanese Yen (JPY) and Swiss franc (CHF) rising. According to ING analyst Francesco Pesole, this shift in the market will be driven by factors such as inflation and the upcoming testimony of Federal Reserve Chair Powell to Congress.
The focus this week will be on US macroeconomic data, with the CPI report for June set to be released on Thursday. It is expected that the core print will show a 0.2% month-on-month increase, in line with consensus. This is likely to further support the expectation of a rate cut in September, with markets currently pricing in an 83% chance of a 19bp cut. The trend of weakening in the US jobs market is expected to prompt the FOMC to cut rates three times this year, starting in September.
The US jobs market will be a key factor in the FOMC’s decision-making process, with the expectation that Chair Powell’s testimony to Congress this week will lean towards a dovish outlook. This comes after a particularly hawkish revision in the June Dot Plot projections. This suggests that the macro story will continue to point towards a decline in the USD, although political developments in both the eurozone and the US will influence the market.
Despite expectations of a USD decline, the downside risks for the Euro-heavy DXY index may be limited due to varying political developments in different regions. Today’s US data calendar is relatively quiet, with no scheduled FOMC speakers. As a result, the market will be closely watching for any indications of future rate cuts and the impact of political events on currency movements.
Overall, the market is likely to be driven by factors such as inflation, US jobs data, and political developments in the eurozone and the US. The potential for rate cuts in the US and the impact of Chair Powell’s testimony this week will play a significant role in influencing the direction of the dollar. Traders and investors will need to stay informed and ready to react to shifting market conditions in the coming days.
