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The U.S. dollar continues to show strength, rising for the second consecutive week, supported by robust U.S. economic data. Despite a 0.4% dip on Friday to 98.100, the dollar is poised for a weekly gain of 0.7%, continuing its bullish momentum from last week’s 1% rise. The positive economic outlook has reduced expectations for near-term interest rate cuts by the Federal Reserve, bolstering investor confidence in the greenback.
Key Economic Data Drives Dollar Demand
- Retail Sales: The U.S. saw a stronger-than-expected rebound in June retail sales, signaling continued consumer confidence and spending.
- Unemployment Claims: First-time claims for unemployment benefits fell to their lowest level in three months, indicating a strong labor market.
- Inflation: Consumer prices rose 5% in June, signaling that trade tariffs are starting to exert upward pressure on inflation.
The Federal Reserve’s stance on interest rates has been increasingly influenced by these positive economic indicators. Currently, traders are pricing in about 45 basis points of rate cuts for the remainder of the year, down from earlier expectations of 50 basis points. The dollar’s continued resilience suggests that the central bank may delay any significant rate reductions in the near future.
Euro and Pound Under Pressure
- EUR/USD: The euro rebounded 0.3% to 1.1623 after dropping to a three-week low of 1.1556 earlier in the week. However, it is still set for a weekly loss of around 0.6%, as weak German producer price data and overall economic uncertainty weigh on the currency.
- GBP/USD: The British pound rose 0.2% to 1.3432, but it is on track for a weekly loss of around 0.5%. The pound faces ongoing pressure from the stronger dollar, despite a modest rebound.
ECB and Bank of England Outlook
- The European Central Bank (ECB) is expected to hold interest rates steady, despite an inflation reading of 2.0% in June, in line with its target. However, U.S. tariff risks remain a significant concern, complicating the ECB’s decision-making.
- For the Bank of England, weak economic data, particularly in consumer confidence, continues to create downside risks for the pound. Traders will be watching for any signs of further dovishness from the Bank of England in light of the growing challenges facing the U.K. economy.
Looking Ahead
With U.S. consumer price index (CPI) data in focus this week, markets are likely to remain on edge regarding the inflationary impact of Trump’s trade tariffs. The dollar is expected to stay supported, but a major shift in trade policy or actions against Federal Reserve Chairman Jerome Powell could introduce volatility.
The euro and pound face a more challenging outlook, as both currencies struggle against the strength of the dollar and rising trade uncertainties. The next few weeks will be crucial in determining the future trajectory for both currencies, especially with ongoing negotiations around U.S.-EU tariffs and concerns over global trade tensions.
