Investors Are Gradually Pushing towards Stronger Dollar

The U.S. Dollar Index (DXY) declined by 0.54% to 97.91 points this week, while the EURUSD rose by 0.60% to 1.16890. The pair has nearly reached its downside target after touching 1.15920 on July 16, following the release of hotter-than-expected U.S. inflation data for June. Headline inflation accelerated to 2.7% YoY from 2.4%, marking the highest reading since February.

Shortly afterward, U.S. President Donald Trump stepped in, determined to push for interest rate cuts. After fueling the American stock market with tax cuts, Trump is seeking lower interest rates to prevent a potential correction in autumn. However, Federal Reserve (Fed) Chair Jerome Powell has resisted political pressure, warning that inflation could climb further due to rising tariffs, making a rate cut premature.

Trump, seemingly running out of patience, wants the Fed to deliver a rate cut at its July meeting, the last before the historically volatile September season for U.S. stocks. In a bold move, Republican Congresswoman Anna Paulina Luna announced that Powell was being removed from his post, citing a $2.5 billion overspend on Federal Reserve building renovations. Some lawmakers were reportedly in support of the effort.

The currency market responded sharply. The EURUSD spiked by 1.39% to 1.17210 within hours of the announcement. U.S. stocks started to fall. While Trump may have assumed that removing Powell would cheer investors expecting faster rate cuts, the market reacted negatively to the threat against central bank independence. Later that day, Trump walked back the move, denying any plan to remove Powell. The EURUSD pair quickly retraced back to 1.15560, helped by strong U.S. retail sales data released on July 17.

Still, the issue remains unresolved. Despite Trump’s calming remarks, pressure on Powell is likely to intensify until he either steps down or the Fed cuts rates. Treasury Secretary Scott Bessent, widely seen as a possible Powell successor, reportedly defended the Fed Chair over the weekend. While Bessent has previously stood by Powell too, his support may no longer be sufficient.

The upcoming Fed meeting, scheduled for next week, adds to the suspense. With a mandatory media blackout in place, FOMC members are silent, though behind closed doors a heated debate is likely underway. Powell is expected to speak publicly on Tuesday, his first appearance since the controversy broke.

On Thursday, July PMI data will be published. In the U.S., business activity is forecast to be mixed, with manufacturing slowing but services still expanding. Meanwhile, the European Central Bank is set to announce its policy decision on Thursday. After nearly a year of uninterrupted rate cuts since September 2024, markets expect a pause or even the end of the easing cycle. This could offer some support for the Euro.

Technically, a short-term rise in EURUSD toward the 1.17000–1.18000 zone cannot be ruled out. However, a return to the 1.15000–1.15500 area is still on the table. The pair may continue to hover near current levels until the Fed's decision adds clarity.

Despite the recent drama, large investors are cautiously positioning in favor of the U.S. Dollar. Last week, they added $2.8 million into the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), a small but notable signal supporting the Greenback.