Forex Outlook: US Dollar Rebound Could Gather Some Pace – ForexNews.PRO
Better-than-anticipated retail figures and unemployment claims data released yesterday have strengthened the argument against aggressive Federal Reserve rate reductions. The market’s remaining expectation of a 14bp cut in September is likely to diminish, further pressuring the EUR/USD exchange rate. Separately, the upcoming Japanese election on Sunday presents a potential catalyst for USD/JPY to surpass the 150.0 mark.
USD: Building Momentum
The dollar index is poised to record its second consecutive week of gains, having increased by more than 2% from its July 1st low of 96.50. Although this increase is smaller compared to the significant losses experienced in the first half of 2025, the dollar’s performance has aligned more closely with underlying macroeconomic factors. Notably, it has regained a positive correlation with 10-year Treasury yields.
A key view we’ve held this summer is that the dollar’s return to predictable behavior reduces the likelihood of renewed sell-offs. This would change if Trump removes Fed Chairman Jay Powell or if trade tensions, especially with China, escalate beyond current market tolerance. Neither of these scenarios is anticipated. We anticipate the dollar to maintain some support as the anticipated 14bp cut for September is reassessed.
Recent data supports this outlook. Without persistent pressure from Trump and dissenting opinions from Fed officials Christopher Waller and Michelle Bowman, a September rate cut would be less likely. Waller has suggested a rate cut at the July meeting due to a weakening labor market. However, retail sales have been strong and initial jobless claims have continued to decline. Furthermore, TIC data revealed substantial net capital inflows of
14 billion outflow in April. This indicates that foreign investors retain confidence in dollar-denominated assets. However, anecdotal evidence suggests increased USD hedging activity, which has contributed to the dollar’s relative weakness.
Today’s economic calendar includes housing data and the University of Michigan surveys for June. We will be watching to see if 1-year inflation expectations continue to decline from their current level of 5%.
EUR: EU Budget Revision Expected
The EU Commission’s proposed EUR 2 trillion budget continues to face strong opposition, particularly from Germany. Chancellor Friedrich Merz has acknowledged a “difficult fight” over the budget for the next two years. It seems unlikely that Ursula von der Leyen’s proposal will achieve unanimous approval without substantial revisions.
While this remains a longer-term issue for the euro, its current trajectory continues to be influenced by US developments amidst stable ECB rate expectations. However, next week’s ECB meeting may prove more interesting than anticipated. While a rate cut remains improbable, tariff risks and a strong euro could rejuvenate a more dovish stance.
These factors support our moderately bearish outlook for EUR/USD, and we continue to anticipate a move towards 1.150 in the near term.
JPY: Election Impact on USD/JPY
Japan’s upper house election has become a significant event for Japanese Government Bonds (JGBs) and the yen. The recent surge in long-dated yields suggests markets are pricing in a notable chance of PM Shigeru Ishiba’s coalition losing its majority, leading to his potential resignation and potential tax cuts by opposition parties.
Should this scenario unfold, increased pressure on long-dated JGBs could push USD/JPY above 150.0. Although not all fiscal concerns may materialize, any negative spillover into JPY should eventually subside. Near-term dollar momentum and increasing skepticism about the Fed’s ability to cut rates are further fueling the USD/JPY rally.
