U.S. dollar rises to monthly highs ahead of key NFP data for July

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Vrasidas Neofytou
Head of Investment Research

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U.S. dollar rises to monthly highs ahead of key NFP data for July

The DXY-U.S. dollar index which tracks the value of the greenback against six major peers climbed as high as 102.80 on Thursday’s trading session, posting its highest level since early July, ahead of the key U.S. NFP-nonfarm payrolls data for July later in the day.

The DXY-dollar index has gained over 3% since bottoming at around 99.60 in mid-July, driven by the stronger-than-expected economic and labor data in the U.S. economy, which have helped overcome concerns over a U.S. rating downgrade by Fitch.

DXY-U.S. dollar index, 4-hour chart

The dollar strength has been adding pressure on the major peers, with Euro falling to monthly lows of $1.0950, the Pound Sterling dropping as low as $1.2620 before recovering higher after BoE hiked rates by 25 bps, while the Japanese Yen touched three-week lows of ¥143.

On Tuesday, rating agency Fitch downgraded the U.S. government's top credit rating to AA+ from AAA, becoming the second major rating agency after Standard & Poor’s to strip the United States of its triple-A rating.

The downgrade was cited by the fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threaten the government’s ability to pay its bills.

Fitch’s downgrade came 2 months after Democratic President Joe Biden and the Republican-controlled House of Representatives reached a debt ceiling agreement that lifted the government's $31.4 trillion borrowing limit, ending months of political brinkmanship.

Key NFP-nonfarm payrolls for July in focus:

Global investors are now focused directly on July’s NFP-nonfarm payrolls data due later in the day, which is expected to show that the U.S. labor market remained steady through last month.

However, if the data show any signs of resilience in the labor market would be positive for the U.S. dollar, since it will give the Federal Reserve more incentive to hike interest rates further in September. Fed is also targeting some cooling in labor conditions as part of their fight against persistent inflation.

The employment data are key signals for investors and Fed’s policymakers since they have remained relatively stronger-than-anticipated in the last months despite benchmark and core inflation eased in the same period.

In case the NFP reading comes below market expectations as it was in June- it might raise the expectations that the Federal Reserve is near the end of its rate hike cycle, potentially adding pressure on the greenback.

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