US dollar rises to two-month highs, Federal Reserve hawkish stance and economic data boost market confidence

XM Foreign Exchange APP News-The US dollar hit a two-month high on Thursday (July 31), and the US dollar index (DXY) firmly stood above 99.50, approaching the 100.00 psychological mark. It has risen by nearly 3% in the past five days, and is expected to achieve its first positive monthly performance this year. The Federal Reserve's hawkish stance caused market shock on Wednesday, and the Federal Reserve kept the federal funds rate unchanged at 4.50% as expected. Powell was cautious at the Federal Open Market stofoco.committee (FOMC) press conference and provided little clear forward-looking guidance. He pointed out that inflation is still unbalanced and labor market indicators are still adjusting, and stressed that more time is needed to assess the economic impact of the Trump administration's tariff policies. The hawkish remarks have weakened market expectations for a rate cut in September. According to CME FedWatch tools, the probability of a rate cut in September fell from 65% on Tuesday to 46%, and the rate cut in December is expected to be 35 basis points. "The dollar's rise is in line with our previous forecasts. Strong GDP data and the Fed's independent attitude towards political pressure further support the dollar, and the rise is expected to continue in the short term." Economic data are mixed, and the labor market is still resilient. The U.S. economic data released on Wednesday is showing a mixed situation. ADP non-farm employment changes data showed that 104,000 new jobs were created in July, higher than expected by 77,000, indicating that the labor market is still resilient amid wider economic concerns. The number of initial unemployment benefits has declined for six consecutive weeks in recent times, the longest consecutive decline since August 2022, further strengthening the market's confidence in the employment market. In addition, the GDP preview value unexpectedly rose to 3.0% in the second quarter, exceeding expectations by 2.5%, reflecting the strong momentum of economic growth. However, the GDP price index was 2.0%, slightly below the expected 2.2%, suggesting that inflationary pressures have been alleviated. The housing market is showing signs of fatigue, with housing sales falling by 0.8% month-on-month, reversing the previous 1.8% growth. China Merchants Bank's Financial Markets Department pointed out that although the details of the July economic data were questionable, the overall performance was stable. If Friday's non-farm employment data did not aggravate market concerns, the focus may turn to inflationary pressures caused by tariffs. ING Bank predicts that December may be the starting point for the Federal Reserve's interest rate cut, but if signs of weak employment and GDP growth intensify, the rate cut may reach 50 basis points. Key data prospects: PCE and non-agricultural markets are focusing on core PCE price index and employment cost index today. The former is expected to grow by 0.3% month-on-month and the latter is expected to rise by 0.8% month-on-month. ING estimates that the monthly growth of core PCE in June may reach 0.46%, higher than the market expectations of 0.3%. If the data exceeds expectations, it may further push up the US dollar. In addition, the number of initial unemployment benefits is expected to rise slightly from 217,000 to 222,000, providing forward guidance for Friday's non-farm employment report. Non-farm employment data on Friday attracted much attention, with new jobs expected to drop from 147,000 to 106,000, and the unemployment rate rose from 4.1% to 4.2%. The average hourly wage is expected to increase by 0.3%, which may affect inflation expectations. The ISM manufacturing PMI is expected to be 49.5, indicating that the manufacturing industry continues to shrink, while the University of Michigan Consumer Confidence Index is expected to rise from 61.8 to 70.0. The market expects whether there will be an upward revision. The US dollar fell slightly before the release of PCE data, but overall bullish sentiment has not changed. The market generally expects that the overall annual rate of inflation will rise from 2.3% to 2.5%, and the core PCE is expected to stabilize at 2.7%. Analysts warn that if inflation data exceeds expectations, the Fed may continue to maintain a hawkish stance and the dollar's rise is expected to continue.

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