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USD firmer but focus on the Fed outlook may limit gains - Scotiabank

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USD firmer but focus on the Fed outlook may limit gains - Scotiabank

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update 2025.08.05 20:40
USD firmer but focus on the Fed outlook may limit gains - Scotiabank

update 2025.08.05 20:40

The US Dollar (USD) is inching higher overall this morning adding to modest gains seen Monday as it recovered from the heavy losses sparked by Friday's jobs data. We should not overweight one data point, but the NFP report showed a two-month net downward revision of 258k--the largest in recent history, ignoring the pandemic era, and possibly the biggest in decades--while the 3-month average employment gain shrank to just 35k, suggesting the labour market may be much weaker than thought, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Potential for gains may be limited as Fed focus intensifies

"The overall balance of last week's data suggests the Fed's dilemma is no closer to a resolution, but the jobs slump will complicate policymaking further. The Fed is behind the eight-ball, but it might be falling behind the curve as well. Swaps are now pricing in 23bps of easing at the September FOMC and some 60bps of easing by year-end. SF Fed President Daly (nonvoter this year and a relative dove) suggested Monday that the time is nearing for a rate cut. Markets will judge the tone of responses to the jobs data from other Fed policymakers carefully but a shift in expectations towards more aggressive easing steps would not surprise us."

"A weak August NFP report could bolster bets on a 50bps cut and that risk may be enough to keep the USD rebound in check for now. Also, President Trump's firing of the head of the BLS and the announcement Friday that Fed President Kugler had resigned, giving the president an opportunity to quickly nominate a replacement will perhaps raise concerns about the resilience of US institutions and may result in investors demanding higher risk premiums for US assets."

"US data releases today cover the June Trade Balance, final July Services and Composite PMI data, ISM Services for July (expected firmer from June's 50.8). The Treasury auctions bills and 3Y bonds. This evening NZ releases Q2 Unemployment data while Japan releases the June Labour Cash Earnings report. Technically, the Friday's sell-off in the DXY should draw a line over the USD's July rebound after the index formed a bearish outside range reversal. That should mean resistance on DXY gains towards the upper 99/low 100 area and pressure on support at 98.30 ahead."


Date

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 : 2025.08.05

Update

Last updated

 : 2025.08.05

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