Expectations for the US Dollar Index amid cautious optimism ahead of the US ISM and NFP data

The US Dollar Index remained directionless, trading around the 101.50 level during early Monday’s Asian sessions. The dollar index bears the burden of market risk sentiment and conflicting concerns about the future Federal Reserve policy. After a two-week uptrend, markets are eagerly awaiting the release of the US ISM (Institute for Supply Management) data for July and the US Non-Farm Payrolls (NFP) report.

These cautious market sentiments are closely tied to the recent downturn in US inflation indicators and expectations of Chinese stimulus measures. Recent news today quoted the Chinese State Council Information Office announcing a new stimulus from Beijing through an unexpected press conference around 07:00 GMT. The press conference is set to include the Vice Chairman of the National Development and Reform Commission in China, Li Chonglin, and officials from the Ministry of Industry and Information Technology, the Ministry of Commerce, and the State Administration for Market Regulation, unveiling further measures to bolster the economy.

Given the pessimistic US inflation indicators released on Friday, it can be inferred that the Federal Reserve will continue its monetary tightening during its upcoming meeting, which supports the strength of the dollar. This is especially true after Federal Reserve Bank of Minneapolis President Neel Kashkari expressed his concerns about job losses and economic growth slowdown, and raised his inflation rate expectations. He criticized the central bank’s strong monetary policy measures aimed at curbing rising prices.

It is worth noting that strong US Annual Gross Domestic Product results for the second quarter of 2023, coupled with optimistic figures for US Durable Goods Orders in June, allowed the US dollar to remain more stable for the second consecutive week. Additionally, the European Central Bank’s cautious approach to interest rates and its focus on data dependence for its next rate decision may have contributed to the dollar’s stability in positive territory.

Regarding the current market mood, it can be observed that Wall Street closed positively, and US bond yields and the dollar declined together. However, the US Dollar Index recorded weekly gains for the second consecutive week by the end of trading on Friday. It is important to mention that the US ISM data and other economic data to be released this week, along with risk factors, may dominate the dollar’s sideways trading before the US NFP report for July, which will be critical in monitoring and determining clear trends for the index.

Although the clear upward break of the strong support area around 100.80 adds to the more stable oscillation indicators favoring US Dollar Index buyers, the upside recovery for the dollar remains limited as long as the price remains below resistance near 102.50. Despite some short-term upward momentum, it is safe to say that this momentum is more tied to relatively strong expectations for the US economy and US stock markets. At the moment, the markets do not anticipate further Federal Reserve interest rate hikes, which raises liquidity levels in the US markets. This appears to be the primary factor pushing the US dollar higher at present.