The US Dollar Index (DXY) continued to consolidate losses on Monday, trading below 100.00 and hovering near its lowest levels since mid-June, as the currency struggled to recover from the impact of disappointing US Nonfarm Payrolls (NFP) data released on Friday [1]. The NFP report showed that the US economy lost 23,000 jobs in July, fueling concerns about a slowdown in the US labor market and reducing expectations for further monetary tightening by the Federal Reserve (Fed) [2]. As a result, market-implied odds of a Fed interest-rate hike in September dropped to less than 45%, down from around 67% a week earlier [2].
Analysts at ING noted that their dovish Fed outlook is strengthening, reinforcing a bearish bias on the Dollar. They highlighted that 11 basis points are still priced in for September, 28 for December, and 40 for April, suggesting there is ample room for further dovish repricing that could harm the Dollar if their Fed outlook proves correct [1]. Societe Generale experts observed that the latest employment data has shifted the Fed outlook and raised questions about the direction of bond and FX markets in the second half of the year. They emphasized that the DXY must defend its 200-day moving average at 99.18 to avoid a deeper drop [1].
Commerzbank analysts pointed out that, despite the weak data, the correction in Fed tightening expectations was moderate, with only about six basis points priced out until the December meeting, and a rate hike still expected by year-end. The USD's depreciation was also limited to roughly 0.4%, indicating considerable scope for further correction if upcoming data, such as this week's inflation figures, are weaker than expected [1]. Brown Brothers Harriman strategists added that a soft US CPI print would strengthen the case for a dovish repricing in Fed hike expectations and further undermine the USD, while a hot CPI print could trigger a short-term USD bounce [1].
The British Pound (GBP) benefited from the Dollar's weakness, with GBP/USD trading around 1.3495 on Monday, up 0.04% on the day, though struggling to hold above the 1.3500 level [2]. The Greenback attempted to stabilize, supported by ongoing geopolitical uncertainty in the Middle East and the potential for higher oil prices to keep US inflation elevated, which could preserve the possibility of another Fed rate hike later this year [2]. Investors are now focused on upcoming US inflation data, which could influence the interest-rate outlook and the Dollar's direction [2].
On the UK side, attention is turning to Thursday's preliminary Q2 GDP estimate, with expectations for 0.4% quarterly growth, down from 0.6% previously. Brown Brothers Harriman strategists and the Bank of England both project a slowdown in UK growth, and warn that absent a GDP beat, UK rate pricing could be vulnerable to a dovish repricing against GBP [2].
CONCLUSION
The US Dollar is under pressure following disappointing jobs data and a shift in Fed rate hike expectations, with analysts highlighting the potential for further downside if upcoming inflation data is also weak. The British Pound has gained modestly as a result, but both currencies face key data releases that could determine their near-term direction. Market participants are closely watching US inflation and UK GDP figures for further clues on monetary policy and FX trends.