The dollar index is testing key support near 99.50 after Friday's near 0.5% drop, triggered by a surprise US jobs report that has cut bets on a Federal Reserve rate hike this year. Gold has pushed above $4,300 and USD/JPY carry trades persist as markets await Wednesday's US inflation data.
The dollar index is consolidating near its 99.50 support zone after Friday's almost 0.5% drop, triggered by a downbeat US nonfarm payrolls report that cooled bets on a Federal Reserve rate hike. Traders now turn to Wednesday's US inflation print for more clues on the central bank's path.
Payrolls Miss Cuts Odds of a Fed Rate Hike
Employment in July unexpectedly fell by 23,000, while May's gain was revised down to 63,000 from 129,000 and June's to 20,000 from 57,000. As a result, the economy has added an average of 44,000 jobs a month over the past six months. According to FxPro analysts, the last time payrolls ran this weak, the Fed responded by cutting rates.
Futures markets have since cut the odds of a September rate hike to 46% from 67% a week ago, while the probability of two hikes in 2026 slipped to 32% from 46%, weakening the dollar against major currencies.
White House Pressure Adds to the Dollar's Woes
The decline is compounded by renewed White House pressure on the Fed: the administration is taking further steps to remove Lisa Cook from her post as a Fed governor. Coupled with reports of conversations between Donald Trump and Kevin Warsh, this casts a shadow over the central bank's independence and adds to the sell-off in the dollar.
Middle East Tensions Offer the Dollar a Lifeline
Geopolitics is providing a counterweight. Iran has signaled readiness to strike a deal with Oman to reopen the Strait of Hormuz, provided sanctions are lifted, US troops withdraw from the region and reparations are paid. It is doubtful that Washington would agree to this, which heightens the risk of escalation and bolsters the dollar's safe-haven appeal.
Gold and the Yen React
The weak jobs data has also fueled a rally in gold: the metal pushed through the $4,300 mark and has consolidated above it, supported by reduced inflation pressure on Fed policy and falling US Treasury yields.
In the yen, bears briefly pushed USD/JPY below ¥157 after the payrolls miss, before the wide rate gap between the Fed and the Bank of Japan drew carry-trade buyers back in and the pair rebounded above ¥158. FxPro analysts expect the rally to continue.
Technically, the 99.50 zone — the 50% retracement of the index's move from 97.44 to 101.55 — is the level bears need to break. A firm break below that and the recent 99.25 spike would expose support at 99.00, while a reclaim of the 99.90-100.00 zone would put bears on the sideline.
Sources: ActionForex, ActionForex
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