07/08/2025 Market Watch

Dollar Slips Further as Markets Eye September Rate Cut

Key Takeaways:

  • US dollar continues to weaken, with little relief from earlier consolidation.
  • Euro rallies toward $1.17 despite soft German industrial output.
  • Fed officials hint at a possible September rate cut, reinforcing dovish sentiment.
  • US imposes reciprocal tariffs, hitting India but sparing China for now.
  • Taiwan equities jump after US exempts domestic chip investors from tariffs.
  • Global bond yields edge lower, while European and US equities gain traction.
  • Gold consolidates near two-week highs, oil remains under $65.

After sharp losses last Friday, the US dollar briefly stabilized at the start of the week but resumed its slide on Wednesday. It remains broadly weaker against most G10 and emerging market currencies. The euro climbed close to $1.17, shrugging off a disappointing German industrial production report, while sterling extended its recovery despite speculation that the Bank of England may cut rates soon. Comments from three Fed officials signalled growing support for a US rate cut as early as September, adding to the downward pressure on the greenback.

Geopolitical tensions remain elevated following the implementation of reciprocal US tariffs. Notably, India faces a 25% penalty for purchasing Russian oil, while China has yet to be targeted, with an August 12 deadline for a potential agreement looming. In a separate move, the US confirmed that semiconductor tariffs would be waived for companies investing domestically. This triggered a rally in Taiwanese equities, which surged by nearly 2.4%, though Indian markets posted marginal losses.

In global equities, Europe’s Stoxx 600 rose 0.75%, on track for its largest daily gain in weeks. US index futures also pointed higher, supported by easing bond yields. Benchmark 10-year government bond yields in Europe dropped 1 to 2 basis points, and the US 10-year yield fell to 4.23%. Meanwhile, gold is consolidating after nearing $3400 earlier in the day, and oil remains weak, with WTI trading below $65 for the first time since early July.

United States of America

Overview

The US dollar remains under heavy pressure, with the Dollar Index (DXY) falling to nearly 98.15 after being rejected just below 100.25 last week. The index continues to edge lower and is now testing key support levels near 98.00. A further drop could target the 97.85 area, which marks a significant retracement of the rally from the multi-year low seen on July 1. Additional technical pressure is building, as the five-day moving average may soon cross below the 20-day, signalling potential downside momentum.

On the economic front, second-quarter nonfarm productivity and unit labor costs are derived from GDP data. These suggest a rebound in productivity after a 1.5% decline in Q1, while unit labor costs have cooled from a sharp 6.6% increase earlier this year. Economists are also closely watching wholesale sales and inventory figures, which may influence upcoming GDP revisions. The most closely followed release today, however, is the weekly jobless claims. Despite a softer nonfarm payroll report last week, jobless claims have been steadily improving. Initial claims have dropped for six consecutive weeks through July 18, and the four-week average declined to 221,000 by the end of July, the lowest reading in three months.

Economic Drivers

  • Q2 productivity shows signs of recovery while labor cost pressures ease.
  • Wholesale trade data could impact revisions to Q2 GDP growth.
  • Jobless claims offer a more resilient view of the US labor market, offsetting concerns from last week’s payroll data.

Data and Events

  1. 07 August 2025: FOMC Members Speak
  2. 07 August 2025: 10-y Bond Auction
  3. 07 August 2025: Unemployment Claims

Price Action

  • Dollar Index hovers near 98.00, with critical support at 97.85 and 97.55.
  • 5-day moving average is close to crossing below the 20-day, a bearish signal.
  • Momentum indicators reflect continued downward pressure on the dollar.

Key Points:

  • Dollar Index is under pressure and testing major support levels.
  • Labor market data remain firm despite weak nonfarm payrolls.
  • Productivity and labor costs suggest improved Q2 efficiency.
  • GDP revisions may be influenced by wholesale trade data.
  • Technical indicators show a weakening short-term trend for the dollar.

Canada

Overview

The Canadian dollar has displayed a nuanced performance against the US dollar, often acting contrary to expectations. In the first half of the year, despite a generally strong US dollar environment, the Canadian dollar was the weakest performer among the G10, rising approximately 5.5% against the greenback. However, when the US dollar surged in July, the Canadian dollar showed surprising resilience, recording the smallest loss among G10 peers at roughly 1.8%. In contrast, during yesterday’s broader US dollar weakness, the Canadian dollar posted only a modest 0.25% gain, outperforming only the Swiss franc.

Despite recent fluctuations, the US dollar has declined from its recent peak near CAD 1.3880 to around CAD 1.3720. This move places it near key technical levels, including the 20-day moving average and the midpoint retracement of gains from the July 23 low. While today’s data calendar features the IVEY PMI survey, more significant market focus is on tomorrow’s Canadian employment report. The IVEY survey is typically stronger than the composite PMI, which has remained below the 50-mark all year, averaging just 43.8 in the second quarter. In contrast, the IVEY survey averaged 50.03 in Q2, its weakest since Q2 2020.

Economic Drivers

  • The Canadian dollar tends to underperform when the US dollar weakens and outperform when the US dollar strengthens.
  • Canada's economy has shown subdued business activity, reflected in weak PMI readings throughout the year.
  • The IVEY survey indicates a slightly stronger pulse but has also weakened recently.
  • Markets are watching closely for upcoming employment data for broader economic signals.

Data and Events

  1. 07 August 2025: Ivey PMI

Price Action

  • USDCAD reversed lower from near 1.3880 to trade around 1.3720.
  • Key support is seen near the CAD1.3725 zone, including the 20-day moving average and 50% retracement level.
  • Additional support may emerge near the CAD 1.3690 to CAD 1.3700 area.
  • Canadian dollar gains remain modest even in a weaker USD backdrop.

Key Points:

  • Canadian dollar shows muted response to recent US dollar weakness.
  • July IVEY survey signals ongoing softness in business activity.
  • Market attention shifts to Canada’s employment data tomorrow.
  • CAD technical support aligns near the 1.3725 to 1.3690 zone.
  • Overall performance remains mixed despite macro headwinds.

China

Overview

The Chinese yuan strengthened slightly as the US dollar retreated over the past few sessions. After being capped just above CNH7.1955, the dollar fell to a session low near CNH7.1835 in North American trading, pushing closer to the bottom of this week’s range near CNH7.1765. This move was supported by a broader weakening in the dollar and the People's Bank of China setting the daily reference rate for the yuan at CNY7.1345, its strongest level since November.

On the trade front, China’s July trade surplus narrowed significantly to $98.2 billion from $114.75 billion in June, though both exports and imports showed year-over-year improvement. Exports rose 7.2%, up from 5.9% in June, while imports increased 4.1%, accelerating from 1.1% previously. Over the first seven months of 2025, China reported a surplus of $684 billion, compared to $521 billion during the same period in 2024. Exports to the US, however, continue to decline sharply, down 22% year-over-year after a 16% drop in June. China has managed to diversify export markets, but US efforts to reduce reliance on Chinese supply chains have proved more challenging. A potential US-China trade deal is reportedly near, and it could pave the way for a future Trump-Xi meeting.

Economic Drivers

  • PBOC continues to guide the yuan stronger through its daily reference rate.
  • July trade surplus narrowed but both exports and imports showed accelerated growth.
  • Significant year-over-year drop in exports to the US signals persistent geopolitical friction.
  • China has diversified its export demand to offset reduced US trade.
  • A potential trade deal may serve as a key step toward higher-level diplomatic engagement.

Data and Events

  1. 07 August 2025: Trade Balance
  2. 07 August 2025: USD-Denominated Trade Balance

Price Action

  • Dollar capped near CNH7.1955 before falling to CNH7.1835.
  • Current range extends toward CNH7.1765 to CNH7.1775.
  • PBOC reference rate set at CNY7.1345, its strongest fix since November.

Key Points:

  • Yuan firmed as the dollar weakened and the PBOC guided a stronger fix.
  • China’s trade surplus narrowed in July, but trade activity improved overall.
  • Exports to the US declined sharply, reflecting ongoing geopolitical strain.
  • Trade diversification helped China offset reduced US demand.
  • A near-term US-China trade agreement could support sentiment.

Europe

Overview

The euro extended its recovery this week, gaining strength after a brief consolidation phase. It moved above $1.1670 yesterday and neared the $1.1700 mark in today’s session. This rise marks its first close above the 20-day moving average since late July and suggests renewed upside momentum. The currency also cleared the 61.8% retracement of last month’s decline, setting its sights on a broader trendline near $1.1765. The narrowing yield differential between US and German two-year bonds has contributed to the euro’s gains, falling from 207 basis points in early July to around 180 basis points now.

Germany’s recent economic data has painted a weaker picture. Industrial production dropped 1.9% in June, significantly worse than expected, and the prior month’s gain was revised sharply lower. Adjusted for workdays, output is down 3.6% year-on-year. In trade, Germany posted a smaller than expected surplus of 14.9 billion euros as exports recovered only modestly and imports rebounded strongly. These figures, alongside earlier weak factory orders, add to concerns that Germany’s Q2 GDP figure may be revised lower, reinforcing doubts about the momentum of the eurozone's largest economy.

Economic Drivers

  • Euro gains supported by narrowing yield gap between US and German bonds.
  • Germany’s industrial production contracted sharply in June and May’s figure was revised lower.
  • Weak factory orders and modest trade surplus signal soft external demand.
  • Risk of a downward revision to Q2 German GDP remains.
  • Rebound in imports and sluggish exports point to imbalanced trade recovery.

Data and Events

  1. 07 August 2025: German Industrial Production
  2. 07 August 2025: German Trade Balance

Price Action

  • Euro broke above $1.1670, approaching $1.1700 resistance.
  • Closed above 20-day moving average for the first time since 25 July.
  • Cleared key retracement at $1.1660, targeting trendline near $1.1765.
  • Daily momentum indicators turning higher, suggesting further strength.

Key Points:

  • Euro extended gains as yield differential with the US narrowed.
  • Germany’s industrial and trade data indicate weakening economic momentum.
  • Industrial production fell more than expected, and prior data was revised down.
  • Potential for German Q2 GDP to be revised lower adds downside risk.
  • Euro technicals show growing bullish momentum.

United Kingdom

Overview

Sterling has continued its upward momentum this week, building on gains triggered by last Friday’s weak US jobs report. After reaching $1.3310 late last week, the currency advanced to nearly $1.3370 yesterday and touched $1.3380 in today’s session. These levels align with key retracement markers of the previous downtrend from the July 24 high near $1.3590. Further resistance is located between $1.3390 and $1.3420, where additional retracement levels and the 20-day moving average converge. The trendline from July’s two highs lies near $1.3465, which also coincides with the midpoint of last month’s losses.

All attention now turns to the Bank of England, which is widely expected to lower its base rate by 25 basis points to 4.00% today. This would mark the third rate cut this year following two in 2024. Markets are already pricing in another cut before year-end, with a roughly two-thirds chance of yet another cut in the first quarter of 2026. The terminal policy rate is expected to settle between 3.25% and 3.50%, reflecting growing confidence in the disinflation trend and a softer economic outlook.

Economic Drivers

  • Markets are fully pricing in a 25 bp rate cut by the Bank of England.
  • This would be the third rate reduction in 2025 following two in 2024.
  • Another cut is expected in Q4, with potential for further easing in early 2026.
  • Terminal policy rate is projected between 3.25% and 3.50%.
  • Monetary policy outlook reflects continued disinflation and moderated growth expectations.

Data and Events

  1. 07 August 2025: BOE Monetary Policy Report
  2. 07 August 2025: Monetary Policy Summary
  3. 07 August 2025: MPC Official Bank Rate Votes
  4. 07 August 2025: Official Bank Rate

Price Action

  • Sterling climbed from $1.3310 last Friday to $1.3380 today.
  • Approaching resistance near $1.3390 to $1.3420, where key retracement levels and 20-day moving average are located.
  • Trendline from July highs intersects near $1.3465, aligning with broader retracement targets.
  • Price momentum remains constructive as market awaits BOE decision.

Key Points:

  • Sterling extended gains ahead of BOE rate cut announcement.
  • Market expects a 25 bp cut today, with more easing likely later this year.
  • Resistance levels cluster between $1.3390 and $1.3465.
  • Terminal rate projections signal a shift to a more accommodative stance.
  • Price action remains supported by dovish rate expectations.

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