USD: What comes after the weak start to the year? - Commerzbank

The euro gained 13.8% against the US dollar in the first six months of this year, marking the best start to a year against the greenback since its introduction. In the last three months alone, the euro gained 9%, representing one of its best quarters against the US dollar. However, this is largely due to the weakness of the US dollar rather than the strength of the euro. The US dollar index lost 10.7% against a basket of currencies in the first half of the year -- the weakest start to a year for the index since 1973, Commerzbank's FX analyst Volkmar Baur notes.

USD may continue funneling down

"Most recently, the euro has appreciated against the US dollar for eight consecutive days. It has only achieved a longer winning streak on one previous occasion. Another rise today would equal this record. And looking at the agenda of the next few days, this seems entirely possible. The Big Beautiful Bill is still being discussed in the Senate and is expected to be put to a vote soon. The version recently passed by the House would have significantly increased US debt, but this has been raised again in the Senate version currently under discussion. If the Republicans can secure a majority in the Senate, the House of Representatives will have to vote on this version again. However, the direction in which we are moving is clear and does not bode well for the US dollar."

"In addition, a series of data on the US labour market will be released over the next three days. This starts with the JOLTS report today, followed by initial jobless claims and the main labour market report on Thursday. It should be noted, however, that it is not entirely clear how the market would react to a strong labour market in particular. If the labour market data is weak, the situation should be relatively straightforward. A significant negative surprise would raise expectations of an interest rate cut in July and further weaken the US dollar."

"Conversely, a strong labour market report would not necessarily be positive for the US dollar. If the market continues to expect the Fed to cut interest rates despite a strong labour market, this would weigh heavily on the US dollar. The market would then effectively start to price in a politically motivated Fed that would cut interest rates independent of the data. This would certainly weigh on the US dollar. Therefore, only a strong labour market report and a corresponding adjustment to Fed expectations are likely to support the US dollar. The next few days will therefore provide the first indication of what will follow the US dollar's weak start to the year."