Fed Shapes Stronger Dollar

The U.S. Dollar Index (DXY) rose by 1.21% to 101.56 points on Monday, as the EURUSD pair dropped by 1.25% to 1.11060. This move brought the pair down to primary short-term downside targets between 1.11000 and 1.11500, with an intraday low of 1.10640—the lowest level since 10 April, when trade tensions and a major sell-off in U.S. Treasuries rattled markets.

Long-awaited trade negotiations between the United States and China finally commenced over the weekend. Both countries agreed to reduce tariffs: U.S. import duties on Chinese goods will fall to 30%, and Chinese tariffs on American goods will be lowered to 10%. In addition, China has agreed to lift the ban on Boeing aircraft imports. The talks are expected to last 90 days, but a breakthrough remains unlikely unless one party agrees to compromise — an outcome that currently seems far-fetched. In this context, the U.S. Dollar may continue recovering its tariff-related losses by mid-August, potentially pushing the EURUSD down further toward the 1.07500–1.09500 range.

There appear to be no immediate barriers to further Dollar strength. Nonetheless, large institutional investors are exhibiting curious behaviour by continuing to bet against the Dollar. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) recorded $18.3 million in net outflows last week, surpassing the $14.4 million in outflows from the previous week. These investors have been net sellers in five of the past seven weeks. Although their positions remain in positive territory for now, continued Euro weakness could shift them into losses. It remains unclear why profit was not taken when the EURUSD traded at 1.15000, and why averaging into losing positions is preferred — particularly in the absence of any compelling case for renewed Dollar weakness.

Recent U.S. PMI data showed a decline in business activity, but the Atlanta Federal Reserve’s GDPNow model forecasts that the American economy will rebound, projecting a 2.2% quarter-on-quarter growth rate in Q2, following a 0.3% contraction in Q1 2025. These conditions reinforce expectations of a hawkish Federal Reserve. Accordingly, the probability of a quarter-point interest rate cut in June has dropped to 11.7%, down from 30.5% previously.

Attention now turns to April’s inflation data, set for release on Tuesday. Markets expect consumer prices to rise by 0.3% month-on-month, while the annual rate is projected to remain steady at 2.4%. These figures are likely to influence the tone of Federal Reserve Chair Jerome Powell’s remarks on Thursday, with a firm inflation reading supporting a continuation of the Fed’s hawkish rhetoric.

Retail sales data for April may pose some risk to the Dollar’s upward momentum, particularly if the figures disappoint. Technical factors also come into play, as the EURUSD has now approached intermediate support between 1.11000 and 1.12000. A clear break below the 1.11000 level is required to confirm a move towards deeper downside targets at 1.07500–1.08500. Conversely, if the pair holds above support, a rebound towards 1.12500–1.13500 is possible, but only if it can first surpass resistance at 1.12000.