The US Dollar has dropped recently, with the Dollar Index hitting a new low, partly due to Canada’s national holiday. However, the USD has slightly recovered as markets prepare for upcoming US data and adjust their positions ahead of the long US weekend. This year, the USD has faced a significant decline, with the Dollar Index falling nearly 11% since January 1. This marks the worst start to a year for the USD in modern market history, driven by worries about US trade and fiscal policies, along with possible limits from the Federal Reserve.

Dollar Index Speculation

Some believe the Dollar Index might fall to the 90/95 range in the coming months. The ADP jobs data points to moderate hiring in June, with predictions of adding 95,000 jobs. Meanwhile, the Non-Farm Payrolls data, expected tomorrow, may show an increase of 110,000 jobs, which is below the average of 135,000 jobs over the last three months. With the USD’s decline slowing down, institutional portfolios are changing how they approach upcoming economic reports. Traders are rethinking long-dollar positions, possibly due to uncertainty about whether the Federal Reserve can maintain its current interest rates amid softer data. It’s essential to pay attention to the latest ADP employment numbers. The moderate estimate of 95,000 jobs added suggests companies are being more cautious about hiring, possibly due to concerns over future demand. This indicates the labor market is still strong but not putting much upward pressure on wages and inflation. If tomorrow’s Non-Farm Payrolls figure stays below trend, the central bank may have less reason to adopt a more aggressive stance in July. Notably, any number around or below 110,000—especially if revisions for previous months are negative—could heighten expectations for rate cuts in Q3. The key will be how fixed-income markets react to this information. A muted response in Treasury yields could reinforce the current trend in the USD and allow for more USD shorts to develop. Offers just above 105 on the Dollar Index might hold for now, but if it drops below 102.50, it could prompt another wave of action driven by CTA traders. Our volatility models are shifting toward more significant directional movements once tomorrow’s data risks are out of the way. Expiry traders should watch as the market shows some demand for downside strikes on USD pairs, which aligns with the flattening rate volatility curve. Pay special attention to cross-currency basis spreads, like USD/CAD, where liquidity has become noticeably thinner.

Upcoming Economic Indicators

Setting risk levels correctly around the NFP release is crucial, but it’s also vital to keep an eye on upward gamma positioning for USD/JPY and EUR/USD. These could be critical points if US data disappoints—especially if yields drop sharply, forcing speculative positions to unwind. Keep an eye on US swap spreads in the mid-range. If they diverge from historic correlations with the DXY, it could indicate a loss of investor confidence in holding dollar assets without extra reward. Traders with complex options may want to gradually move towards a neutral position in response to payroll data, especially in G10 pairs showing a decline in realized volatility. Lastly, the dollar tends to weaken seasonally after US Independence Day, but this trend isn’t always straightforward. If the ECB remains cautious later this month while US inflation eases, it could push EUR/USD higher, perhaps into the 1.0980 range. Prepare for potential model rebalancing before the US earnings season, which could enhance that movement. Stay vigilant. Volatility is currently low, but it won’t stay that way for long, especially as macroeconomic liquidity decreases next week during calendar gaps. Create your live VT Markets account and start trading now.

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