The US Dollar Index (DXY) was trading near 99.05 in Asian hours on Monday, extending gains as markets assessed developments around a US-Iran peace deal. Attention later in the session turns to US macro data, with the ISM Manufacturing PMI due for release.
Diplomatic contacts between Tehran and Washington continued over the weekend, while President Donald Trump on Monday requested edits to the draft agreement, with changes focused on the Strait of Hormuz and the removal of highly enriched uranium. The next major test for the dollar is Friday’s US labour report: consensus expects Nonfarm Payrolls to rise by 96K in May, while the Unemployment Rate is seen holding at 4.3%. Rate expectations remain active, and futures imply a near-41.2% chance of a 25 bps Fed hike by year-end, based on the CME FedWatch tool.
US-China Trade Tensions and Dollar Movement
The US Dollar Index (DXY) is holding near 104.50 as the new month begins. We are seeing the market digest recent developments in ongoing US-China trade negotiations. Attention now turns to the US ISM Manufacturing PMI report, which was just released showing a reading of 49.5, indicating a slight contraction in the factory sector for May.
Reports indicate that discussions between Washington and Beijing remain tense, with significant disagreements over technology tariffs. This uncertainty is creating a cautious tone in the market, supporting some haven demand for the dollar. We believe any surprise breakthrough or breakdown in these talks could introduce significant volatility, which can be hedged using options on currency ETFs like UUP.
US Labour Market Data and Rate Expectations
This Friday’s US employment data for May will be a major focus for us. Consensus expectations are for Nonfarm Payrolls (NFP) to show an increase of around 150,000, with the unemployment rate holding at 4.1%. A stronger-than-expected number would likely bolster the US Dollar by pushing back against fears of a slowing economy.
We are noting that derivative markets are now pricing in approximately a 60% probability of a 25 basis point Federal Reserve interest rate cut by the end of the year, according to the CME FedWatch Tool. This expectation makes upcoming data releases, especially this week’s jobs report, critical events. A surprisingly strong NFP figure could cause a rapid repricing of these odds, creating opportunities in interest rate futures and options.
