USD Index Rises on Strong U.S. Economic Data

In North American afternoon trading, the U.S. Dollar Index (DXY) climbed to 102.94, marking a 0.33% gain. This upward movement was fueled by stronger-than-expected U.S. retail sales data and lower-than-anticipated jobless claims, which tempered the market’s dovish outlook regarding potential Federal Reserve rate cuts. The robust economic indicators suggested that the recent decline in payrolls might have been an outlier rather than indicative of a broader trend, prompting a recalibration of interest rate expectations.

Surge in U.S. Treasury Yields

U.S. Treasury yields experienced significant increases in response to the data, with yields on 2-5 year notes rising by 16-14 basis points and longer-term yields climbing nearly 10 basis points. The shift in yield dynamics was evident in LSEG's Interest Rate Probability Rate (IRPR), which now reflects a reduced likelihood of a 50 basis point Fed rate cut in September. Futures markets indicate only a 26% chance of such a cut, with expectations for rate reductions by the end of 2024 narrowing from 104 basis points to 94 basis points. The rise in yields broadly supported the dollar, especially against lower-yielding currencies, though higher-yielding currencies managed to outperform due to the broader risk-on sentiment prevailing in the markets.

Market Focus on U.S. Consumer Resilience

The market outlook is now heavily focused on the resilience of the U.S. consumer, underscored by the strong retail sales figures. This has bolstered confidence in the U.S. economy’s ability to withstand higher interest rates. Equities responded positively to the data, with the Nasdaq gaining 2.1% and the S&P 500 rising 1.42% in afternoon trading. This indicates that investors are reassured by the strength of consumer spending. However, caution remains as the Federal Reserve’s next steps are uncertain, with market participants weighing the potential for further economic softening against the need to control inflation. This cautious optimism is reflected in the broader market’s risk appetite, with commodities like silver rallying 2.65% and gold maintaining gains near its all-time highs.

Currency Market Reactions

• EUR/USD: The euro weakened against the dollar, falling by 0.3% to 1.0979, pressured by rising U.S. yields that outpaced those of German bunds, thereby diminishing the euro’s appeal. The decline in safe-haven flows further contributed to the euro’s weakness, with support found near the 10-day moving average at 1.0947.
• USD/JPY: The dollar surged against the yen, climbing 1.19% to 149.05. This movement was driven by the widening U.S.-Japan yield differential, which continues to favor the dollar as expectations for dovish Fed policy recede. Resistance for USD/JPY is anticipated at 149.42, with the psychological level of 150 also in focus.
• GBP/USD: The British pound initially dipped following the strong U.S. data but quickly rebounded to match its recent high at 1.2871, before settling slightly lower at 1.2852. The pound’s strength was supported by its high yield and positive correlation with risk sentiment. Upcoming UK retail sales data will likely be a key determinant of whether sterling can break through the 1.2870 resistance and potentially move toward 1.30.

Outlook and Future Data

Looking ahead, the currency market’s outlook remains closely tied to upcoming economic data releases and central bank actions. For the U.S. dollar, the resilience of consumer spending and labor market conditions will be critical in shaping the Federal Reserve’s policy trajectory, with further signs of economic strength likely to support the greenback. Meanwhile, the euro and yen will remain sensitive to relative yield movements, with EUR/USD potentially facing additional pressure if U.S. yields continue to rise.