Investors Recall High Inflation Fears

The U.S. Dollar Index (DXY) is rising by 0.1% to 105.05 points, while the EURUSD is down by 0.1% to 1.08210. This mirrors the market situation from last Tuesday, although the Dollar is weaker by 1.0% now.

Last week, the Greenback was recovering following the first round results of the French parliamentary election. The American currency lost another 0.7% to 1.08160 on weak Nonfarm Payrolls by ADP and a U.S. Services PMI that fell to 49.6 points, indicating a contraction of the sector. The cooling of the American economy was confirmed by the June Labour Market Report, where unemployment unexpectedly rose to 4.1%, while Nonfarm Payrolls hit 206,000, above the consensus.

U.S. 10-year Treasury yields dropped to 4.27%, down from 4.40%, and slightly recovered to 4.29% this week. Bets on a rate cut by the Federal Reserve (Fed) in September increased to 77.1% from 64.1%. Investors believe that the Fed will have to cut rates in September, and Fed Chair Jerome Powell might address this during his testimony to Congress on Tuesday or Wednesday. If Powell hints at a potential rate cut, the EURUSD could surpass the resistance at 1.08300-1.08500 and aim for 1.10000. Conversely, if Powell maintains a hawkish stance, indicating persistent inflation issues, the EURUSD could fall towards 1.05000.

Wall Street expects the PCI index to slow to 3.1% YoY in June from 3.3% in May. However, a 5% rise in oil prices in June could challenge these expectations, potentially causing inflation to rise again. Large investors are adopting a wait-and-see approach. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported a neutral balance of fund inflows last week after three weeks of net outflows and one week of net inflows. Large investors were observed taking profits at 1.06600-1.06700 for the EURUSD and slightly increased their bullish positions for the Dollar as the EURUSD rose to 1.07000. They are now waiting for Powell to provide further direction.