The dollar index (DXY00) on Wednesday extended this week’s rally and rose by +0.88% to a 2-month high. Signs of strength in the US economy boosted the dollar Wednesday after the July ADP employment change rose more than expected by the most in four months, and Q2 GDP expanded more than expected. Gains in the dollar accelerated Wednesday afternoon due to hawkish comments from Fed Chair Powell, who said the labor market “looks solid” and a moderately restrictive monetary policy is appropriate due to inflation risks from tariffs, which dampened speculation of Fed rate cuts.
The US July ADP employment change rose +104,000, stronger than expectations of +76,000 and the largest increase in four months. Also, the Jun ADP employment change was revised upward to -23,000 from the previously reported -33,000.
US Q2 GDP rose +3.0% (q/q annualized), stronger than expectations of +2.6%. The Q2 core PCE price index rose +2.5% q/q, stronger than expectations of +2.3% q/q.
US Jun pending home sales unexpectedly fell -0.8% m/m, weaker than expectations of a +0.2% m/m increase.
As expected, the FOMC voted 9-2 to keep the fed funds target rate unchanged at 4.25%-4.50%. Fed Governors Bowman and Waller dissented in favor of a rate cut, the first time since 1993 that two members of the Fed board have dissented.
The Fed downgraded its economic view, as the post-FOMC statement said, “Although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year.” The FOMC had previously characterized growth as expanding “at a solid pace.”
Fed Chair Powell said the US labor market “looks solid,” and with tariffs starting to show in consumer prices, the current modestly restrictive policy stance is appropriate.
In the latest tariff news, President Trump today said he will impose a tariff rate of 25% on India starting August 1 and suggested he would add an additional penalty due to the country’s energy purchases from Russia.
Federal funds futures prices are discounting the chances for a -25 bp rate cut at 49% at the September 16-17 FOMC meeting and 38% at the following meeting on October 28-29.
EUR/USD (^EURUSD) Wednesday extended this week’s losses and fell sharply by -1.10% to a 7-week low. Wednesday’s stronger dollar undercut the euro. Additionally, the negative carryover from Monday is weighing on the euro, following the announcement of the EU-US trade deal, which was seen as favoring the US, with 15% tariffs imposed on most EU goods. This could pose headwinds to the Eurozone economy due to the higher tariffs. Better-than-expected Eurozone economic news today on Q2 GDP and July economic confidence is supportive of the euro.