DXY – Outlook and Analysis
Outlook: We maintain a bearish bias on the U.S. dollar, driven by rising geopolitical risks, the upcoming August 1 tariff deadline, widening fiscal deficits, potential tariff-induced inflation, and broader macroeconomic instability. Unless there is clearer guidance on fiscal and trade policy, the dollar’s position as a global reserve currency will likely remain under sustained pressure.
Near-term volatility in the USD is expected to remain high as the widely anticipated tariff deadline approaches. However, a major development occurred earlier today, as the U.S. and European Union reached a trade agreement, easing tensions between two of the world’s largest economies. This breakthrough supported a rebound in the DXY and lifted broader equity markets, as global economic sentiment improved. Meanwhile, Canada remains under pressure, as Trump stated that talks with Ottawa remain "rough", with substantial negotiations still required to finalize any deal.
On Thursday, President Trump visited the Federal Reserve headquarters regarding the ongoing renovation project, which has exceeded $2 billion in cost. Fed Chair Jerome Powell defended the expense, citing the need to modernize the aging facility to meet safety and accessibility standards. Despite long-standing tensions, Trump struck a more conciliatory tone, stating that there is "no tension" with Powell and that replacing him would be a "big move"—offering a temporary reprieve to a central bank increasingly under pressure to cut rates.
Looking ahead to the upcoming FOMC, we expect the Fed to hold rates steady. Although part of the tariff-related inflation has started to show, price pressures are likely to remain elevated in the short term. Cutting rates now could risk exacerbating inflation, even if it may provide temporary support to the economy—putting the Fed in a difficult balancing act.
As of this writing, the DXY is trading at 98.172. Bullish momentum appears to be fading, with the RSI slipping back to 50. Resistance levels are seen at 98.647 and 99.166, while support is located at 97.551 and 97.270.
The week ahead is critical, featuring key economic releases including: ADP Non-Farm Employment Change (July 30), FOMC rate decision (July 31), Non-Farm Payrolls (NFP) (August 1).
These data points will provide important insight into the Fed’s policy stance, potentially setting the direction for the U.S. dollar in the weeks ahead.
GBP/USD
Outlook: We maintain a slightly bullish stance on GBP/USD. While recent data has been unfavourable for the pound, there remains a possibility of two additional BoE rate cuts by year-end, depending on incoming economic data and the anticipated slowdown in the second half of 2025. Nonetheless, persistent U.S. economic challenges—including rising business costs, fiscal imbalances, and ongoing global trade tensions—alongside the inflationary impact of Trump’s tariffs, may help cushion downside risks for the pound in the near term.
The UK CPI rose to 3.6%, exceeding the forecast of 3.4%, primarily driven by higher prices in alcohol and tobacco, clothing and footwear, and transport, though partially offset by declines in household services. The persistent price pressure complicates the BoE’s policy path, as subdued economic growth may warrant a rate cut to spur activity, yet doing so could risk further inflation.
The labour market also weakened, with employment falling by 135,000 and the unemployment rate rising to 4.7%, up from 4.6%. Additionally, job vacancies dropped by 56,000 to 727,000, indicating that employers are hesitant to hire or replace departing staff, potentially reinforcing the case for rate cuts to support employment.
As of this writing, GBP/USD trades at 1.34364, showing bearish momentum as the RSI dips below 50. Resistance is seen at 1.35028 and 1.35716, while support levels are at 1.33916 and 1.33413.
Looking ahead, the key events to watch include: M4 Money Supply m/m (July 29), OPEC Meetings (August 3).
These may impact risk sentiment and broader market positioning for GBP in the short term.
USD/JPY
Outlook: We maintain a bearish bias on USD/JPY, reflecting our view that the yen retains upside potential, particularly if Japanese inflation continues to surprise to the upside. The BoJ now has further justification to continue rate hikes following the recent trade agreement with the U.S., which may lead to stabilization or upward pressure on Japanese yields, thereby offering support to the yen.
The Tokyo Core CPI came in at 2.9%, just below the forecast of 3.0%, indicating that inflationary pressures remain persistent. However, more time is needed to fully assess the impact of the 15% U.S. tariffs on Japanese goods, which are still in place.
On July 23, President Trump secured a trade deal with Japan, under which Japan agreed to invest $550 billion into the U.S. This development briefly strengthened the yen, as the deal reduced uncertainty around trade and improved economic sentiment, giving the BoJ more confidence to consider further rate hikes later this year.
Additionally, on July 20, Japanese Prime Minister Shigeru Ishiba lost his majority in the upper house. While members of his own party have pressured him to step down, Ishiba has insisted on staying in office, bringing a degree of stability to the political landscape as there is currently no clear successor. This has helped calm market nerves in the near term.
As of this writing, USD/JPY is trading at 147.650, with bullish momentum still intact, as the RSI has rebounded above the 50 level. Key resistance levels are at 148.103 and 148.792, while support lies at 145.884 and 145.195.
Looking ahead, markets will closely watch: The BoJ Policy Rate decision and The Outlook Report (July 31).
These releases are expected to provide further insights into Japan’s monetary policy stance, and could significantly influence the direction of the yen in the sessions ahead.
Forecasts
|
Currency Pair |
Jul 30 |
Aug 30 |
Sep 30 |
|
GBP/USD |
1.36070 |
1.36070 |
1.37454 |
|
USD/JPY |
145.823 |
145.823 |
143.191 |
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