Dollar Roars Back: A Correction or a Comeback?.

  • Dollar Strength: DXY had its best day since May, driven by euro weakness and broader USD gains.

  • EUR/USD Fragility: Speculative positioning and weak follow-through triggered a sell-off; downside risk persists.

  • Event Risk Ahead: FOMC, US job data, and funding announcements could further support the dollar.

  • EU Trade Deal Fallout: Hopes for clarity gave way to concerns over tariffs; EUR/USD remains under pressure.

  • Sterling Follows Suit: EUR/GBP dropped on positioning unwind; GBP/USD now eyes 1.3150 amid USD-positive bias.

USD: Dollar Bounces Back on Euro Weakness
The DXY dollar index surged to its strongest performance since early May, thanks largely to a euro sell-off. The rally wasn’t confined to EUR/USD—greenback gains were seen across most major pairs. It appears speculative traders bought into EUR/USD at inopportune levels during early Asian trading, and the lack of follow-through in Europe led to a mass unwind of long euro positions. EUR/USD also mirrored the German DAX, which may have seen similarly overextended bets ahead of the anticipated EU trade agreement.

The broader takeaway? Some of 2024’s high-conviction trades, like long EUR/USD and high-yield FX in Latam and EMEA, may be losing steam. We’ve long argued EUR/USD was vulnerable this quarter, and the pair now looks more fragile than previously thought—especially with event risk looming.

Before tomorrow’s FOMC meeting (which could tilt USD-positive), today brings two key data points: US JOLTS job openings (seen steady around 7.5 million) and July’s consumer confidence (likely boosted by strong equity markets). Meanwhile, geopolitical risk remains a wild card, with Trump’s Russia ceasefire deadline raising the risk of secondary sanctions—potentially spiking crude prices and supporting the dollar.

Today also sees a $44bn auction of 7-year US Treasuries. Treasury volatility remains subdued, but all eyes are on tomorrow’s Quarterly Funding Announcement. Any unexpected rise in long-dated issuance could rattle markets.

In sum, we still see room for a dollar rebound this week, driven by positioning. A DXY break above 98.80/95 could quickly target 99.50 and possibly 100.50. We advise holding off on fresh short-dollar positions for now.

EUR: Trade Deal Disappointment Sinks the Euro
Optimism around the US-EU trade deal quickly faded. What began as hope for clarity and business momentum ended in market disillusionment, with leaders realising that across-the-board tariffs may still sting. While it’s somewhat positive that pharma and semiconductors are capped at 15%, the focus may now shift inward—towards bolstering domestic demand.

Today brings Q2 GDP figures from the eurozone, starting with Spain (expected +0.6% QoQ) and Belgium (likely softer than Q1’s +0.4%). The main data drop comes tomorrow, with eurozone-wide growth seen stalling at 0.0% QoQ after a strong Q1.

EUR/USD remains under pressure. If it fails to rally above 1.1600–1.1625 on decent news, expect tests of the 1.1555 and 1.1500 support levels.

GBP: EUR/GBP Cracks on Positioning Washout
EUR/GBP dropped sharply, and while some may credit the UK for securing a “better” trade deal than the EU, this was more likely a classic positioning washout. Diverging monetary and fiscal outlooks had made long EUR/GBP a popular trade, and yesterday that got flushed.

With GBP/USD now below 1.3370 support, further losses are likely. We see room for a move down to the 1.3150 area, particularly with this week’s event risk expected to support the dollar.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.