The Dollar Went Offensive

The U.S. Dollar Index (DXY) rose by a modest 0.10% to 97.26 points this week, while the EURUSD declined 0.20% to 1.17500, signaling that the Euro is beginning to retreat from its recent highs. Much of the previous upward momentum in the EURUSD was driven by Federal Reserve Chair Jerome Powell’s dovish tone at the ECB conference in Portugal in June, where he outlined multiple possibilities for the July FOMC meeting, including the potential for a rate cut. At the same time, the U.S. Senate passed Donald Trump’s new tax bill, which increased the national debt ceiling by $3.4 trillion. While markets viewed this as positive for equities, it was widely seen as a negative for the U.S. Dollar, with rising debt levels shaking confidence in the country's fiscal stability.

The EURUSD peaked at 1.18290 in late June, marking its highest level since September 2021, but the rally soon faltered. A combination of stronger-than-expected U.S. business activity data and political turbulence in the UK—sparked by speculation over Finance Minister Rachel Reeves' resignation—triggered a sharp pullback. The GBPUSD fell 1.33% to 1.35620, dragging the euro lower to 1.17480. UK Prime Minister Keir Starmer later reaffirmed his support for Reeves, helping to calm market nerves.

Further pressure came from an unexpectedly strong U.S. jobs report. Nonfarm Payrolls in June reached 147,000 versus the expected 111,000, a figure made even more striking by ADP’s earlier projection of a 33,000 job loss. Meanwhile, the unemployment rate fell to 4.1%, defying consensus expectations of an increase to 4.3% and marking the lowest level since February. In response, the market swiftly re-evaluated the Fed’s likely path, discarding Powell’s earlier dovish signals. The probability of a July rate cut collapsed from 24.5% to just 4.7%, reigniting a Dollar rally and driving the EURUSD down to 1.17170 before it rebounded slightly to 1.17700 by Friday’s close. That bounce was largely tied to uncertainty around Trump’s July 9 tariff deadline, with markets pricing in the risk of renewed trade tensions, which typically hurt the Dollar.

However, over the weekend, Trump unexpectedly extended the trade deadline to August 1. Markets responded quickly: on Monday, the EURUSD dropped by 0.79% to 1.16860. Trump then raised the stakes further by issuing “tickets” to 14 countries, warning of tariff hikes unless trade deals are reached by the new deadline. China, one of the main targets, criticised the move, particularly provisions that penalise goods re-exported through third countries. Although some see Trump’s moves as largely rhetorical at this stage, the renewed escalation in trade rhetoric prompted some temporary Dollar weakness, pushing the EURUSD back toward 1.17650.

Looking ahead, the release of the FOMC minutes this Wednesday could be pivotal. After the strong labour report, investors will be watching closely to see whether policymakers confirm that a rate cut is now off the table for July. Market participants are also awaiting potential comments from Trump ahead of the July 9 trade deadline, especially regarding ongoing negotiations with the EU—which notably did not receive any tariff warnings. Any breakthrough there could weigh heavily on the EURUSD.

Interestingly, institutional investors don’t appear to be convinced that the Dollar's rebound will last. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net outflows of $42.5 million last week, a figure on par with some of the most aggressive bearish bets placed when EURUSD was trading near 1.09000–1.09500. Since then, the pair has climbed roughly 7.5%. From the perspective of these large players, the next logical target may lie in the 1.22000–1.23000 zone, although reaching that level seems ambitious during the typically slow summer months. From a technical standpoint, a correction toward 1.15000–1.15500 appears more likely in the near term. Only after such a move should traders consider reassessing the broader trend.