The U.S. dollar opened the week relatively stable with a slight upward bias, as the Dollar Index rose to 97.17 points. This limited movement reflects investors’ anticipation of the Federal Reserve’s decision on Wednesday, with markets pricing in more than a 96% chance of a 25 basis point rate cut. Weak U.S. employment data supported these expectations, while inflation failed to add further pressure on monetary policy.
The euro slipped to around 1.1730 against the dollar despite the greenback’s weakness, weighed down by Fitch’s downgrade of France’s credit rating to +A. Markets are watching whether new Prime Minister Sebastien Lecornu can push through necessary but unpopular fiscal reforms, a factor that continues to pressure the single currency in the short term.
Despite this decline, buying momentum remains intact, with net long positions on EUR/USD rising to $18.4 billion close to a two year high. Analysts expect that widening policy divergence between the Fed and the European Central Bank could push the pair toward the 1.20 level in the medium term, although it currently remains rangebound between 1.15 and 1.18.
Sterling climbed to 1.3582 and then extended gains to 1.3593, its highest in a month, supported by expectations that the Bank of England will hold rates steady at Thursday’s meeting. While the bank has cut rates five times in the past year, inflation at 3.8% the highest among G7 economies may keep policy unchanged. Data showing stagnant growth in July suggests a continued balance between supporting growth and controlling inflation.
In Asian markets, USD/JPY held steady near 147.5 amid thin trading volumes due to a holiday in Japan, while USD/CNY retreated to 7.1233 after weak Chinese economic data showed slower industrial production and retail sales along with an unemployment rate rising to 5.3%. These figures highlight persistent deflationary pressures on the world’s second-largest economy. Meanwhile, the Australian dollar continued its strong performance, trading at 0.6662, buoyed by higher commodity prices.
Outlook: Markets are focused on policy decisions from the Fed, the Bank of England, and the Bank of Japan this week. The main emphasis will be on the Fed’s dot plot and Chair Jerome Powell’s remarks to gauge the pace of upcoming monetary easing. On the geopolitical front, U.S.-China trade talks remain an additional factor driving volatility in global markets.
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