The US Dollar Index is trading in a tight range at elevated levels during the Asian session on Tuesday, hovering around the 100.00 mark. The index experienced a pullback on Monday, having earlier surged to a near two-month high of 100.21 due to renewed Middle East tensions, only to retreat towards the 100 level following calls for a ceasefire.
With both Iran and Israel announcing a cessation of attacks against each other, investor focus is shifting away from Middle East geopolitics and back towards the persistent risk of US inflation.
Last Friday's much stronger-than-expected Non-Farm Payrolls report has reinforced market expectations that the Federal Reserve will maintain high interest rates for longer, providing underlying support for the dollar. The Dollar Index is likely to remain firm leading up to the release of the Consumer Price Index data.
Iran and Israel Halt Hostilities
Both Iran and Israel announced on the 8th that they would stop attacking each other, coming less than 24 hours after the latest exchange of fire. According to the Islamic Republic News Agency, Iran's armed forces stated their military operation had concluded following a response to recent Israeli actions. Israeli Prime Minister Benjamin Netanyahu confirmed a temporary halt to attacks against Iran after the latter ceased fire.
Market attention has now pivoted to inflation concerns sparked by last week's robust employment report.
May Jobs Report Surpasses Expectations
The far stronger-than-anticipated May employment report propelled the US dollar broadly higher on Friday. Data from the Bureau of Labor Statistics showed non-farm payrolls increased by 172,000, significantly exceeding economist forecasts of around 85,000. Revisions added a further 93,000 jobs to the prior two months, reinforcing the view of a persistently tight labor market. The unemployment rate held steady at 4.3%, matching its lowest level since last August and well below the long-term historical average of 5.7%.
This outperformance sends a clear signal that the US labor market shows no signs of substantive weakness, despite soaring energy prices and the prolonged closure of the Strait of Hormuz. The breadth of job gains improved, with solid increases in services, manufacturing, and construction. Meanwhile, annual wage growth held at 3.4%, indicating resilient demand for workers even as inflationary pressures from the labor market have eased from their peak.
The market reacted swiftly. The report fundamentally altered investor expectations for the Fed's policy path, reversing the prior consensus of steady rates or even cuts this year. Federal funds futures now fully price in a 25-basis-point rate hike by year-end, with the probability jumping from 45% a week ago to over 70%. This sets a crucial backdrop for Wednesday's CPI report—if inflation also moves higher, the case for Fed tightening will be further solidified.
New Fed Chair Faces Complex Landscape; CPI Data Key
The environment for new Federal Reserve Chair Kevin Warsh is such that he may not be able to deliver the rate cuts previously hoped for by the market. Expectations have shifted following Friday's data.
Cleveland Fed President Beth Hammack noted the economy is "near my definition of full employment," while highlighting inflation remains a concern requiring action. Stephen Brown of Capital Economics wrote that the data "should further ease FOMC concerns about downside risks in the labor market," making it harder for policymakers to ignore high inflation.
The tight labor market elevates the importance of May's CPI data due on Wednesday. Economists forecast headline inflation rose about 0.5% month-on-month, pushing the annual rate to around 4.2%, which would be the highest level in about three years. Core CPI, excluding food and energy, is expected to rise 0.3% monthly, with the annual rate holding near 2.9%.
A weaker-than-expected CPI print could boost equities and weaken the dollar's strength by reopening the door to earlier Fed easing. However, given recent energy price movements, most signs point to upside risks.
Global Central Bank Divergence: Fed on Hold, ECB Poised to Hike
While next week's Fed meeting is almost certain to result in no policy change, other major global central banks are accelerating their shift towards hawkish stances, raising market concerns they risk "falling behind the curve" by being forced into aggressive tightening after inflationary pressures have built.
In Europe, the European Central Bank is expected to initiate a rate hike on Thursday, its first since September 2023. Eurozone inflation rebounded to 3.2% in May, with core inflation rising to 2.5%, well above the 2% target. Despite a surprise Q1 GDP contraction and a sharp drop in German factory orders, the ECB feels compelled to act to maintain its inflation-fighting credibility. Markets fully price in a 25-bps hike this week and anticipate another in September.
In Japan, inflationary pressures are also building. Soaring energy import costs combined with a weak yen are transmitting imported inflation throughout the economy. Market observers expect the Bank of Japan may follow the global tightening trend and end its ultra-loose monetary policy within the year. While the exact timing is debated, the direction towards higher rates is becoming clearer.
In the UK, the Bank of England faces a more delicate balance, leaning towards a hike rather than a cut at its later-this-month meeting. UK inflation remains above target, but economic activity shows signs of slowing, with the housing market particularly vulnerable. However, with rising Fed hike expectations and the ECB moving first, the BoE risks additional imported inflation pressure from a weaker pound if it stands pat.
Overall, the divergence in global monetary policy is narrowing—the Fed is on hold while other major central banks are hiking or signaling hikes. This dynamic of "Fed on hold, others following" may provide the US dollar with a relative advantage in the near term, but also implies that volatility in global financial markets could intensify if the Fed is forced to join the tightening cycle later.
Technical Outlook for the Dollar Index
The Dollar Index's daily chart shows it is within a strong upward channel. The price has rebounded consistently from its May low of 97.62, recently rising near the 100 level and approaching the previous high of 100.64, confirming a clear bullish trend.
The moving average system is in a bullish alignment, with the price above the MA20, MA50, MA100, and MA200. Key support levels lie at 99.27 and 98.89, which appear solid. The crucial resistance above is at the 100.64 level; a break above this could open the door for further gains.
On the indicators, the MACD shows the DIFF line above the DEA line with the red histogram expanding, indicating strengthening bullish momentum. The RSI reading of 64.99 is in bullish territory but not yet overbought, suggesting room for further upside. Overall, the Dollar Index's short-term bullish structure is clear, with any pullbacks unlikely to alter the uptrend. The focus remains on whether it can break through the key resistance level.
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