Dollar Slips Ahead of NFP on Reduced Fed Hike Bets

The dollar fell against most major currencies this week, with the yen the exception. Traders trimmed expectations for two Federal Reserve rate hikes before year-end, and Michael Stark, financial content lead at Exness, cited the perceived de-escalation in the Gulf and softer June inflation as the two negative drivers.

News on 6 August that Iran and Oman agreed to establish a shipping corridor through the Strait of Hormuz pushed oil lower and lifted risk appetite. Stark said traders also anticipate some lull in hostilities in August, with possible resumption of US-Iran negotiations within weeks. The dollar's safe-haven bid faded with the geopolitical premium.

Inflation in the US, like other major economies, has risen less than some feared around the end of the first quarter. June's annual headline print came in significantly below expectations. CME FedWatch, run by CME Group, showed about 45% of traders expect a single hike between now and the end of 2026, while the probability of a move next month fell to around 55% over the past week. CME Group holds an Alpha Score of 59, rated Moderate on AlphaScala.

The July nonfarm payrolls report due 7 August is the next test for the dollar. June's NFP came in at 57,000, roughly half the consensus estimate. The figure still stood well above the 12-month average, and unemployment unexpectedly declined. Stark noted it is too early to call a downward trend in unemployment, with the rate relatively low and softer economic conditions unlikely to produce a significantly better job market.

Stark said July's payrolls number is the deciding input for the two-hike scenario. A significantly better July NFP, combined with higher energy-driven inflation on 12 August, would lift the odds of two Fed hikes before year-end and support the dollar, he said. Annual headline inflation is currently expected at 3.4%.

EUR/USD has bounced since late last month. The market pushed back the most hawkish Fed scenarios, and Gulf tensions eased. Stark said the ECB is likely to call for a single hike by year-end, with about 40% probability of two hikes. Eurozone data has been mixed, though German factory orders on 6 August beat expectations sharply and lifted sentiment.

On the chart, the 100-period simple moving average just below $1.157 is the main dynamic resistance ahead of a test of the 23.6% weekly Fibonacci retracement near $1.16. The slow stochastic shows buying saturation, limiting any immediate upside from a weak NFP. Stark said a solid NFP would likely push the pair back to $1.15, with a stronger CPI on 12 August adding a test near the 20- and 50-day SMA confluence around $1.145. See the EUR/USD profile for more on the pair.

USD/JPY has stabilized around ¥157.50 after the largest joint intervention in decades. Japan spent more than ¥5 trillion on 31 July shoring up the yen, according to official data, alongside US operations earlier that week. Below-target inflation and lackluster GDP growth in Japan make further Bank of Japan hikes questionable. Stark said lower expectations for Fed tightening might delay the next push toward ¥160.

The lack of major change in fundamentals and the buying spike around the interventions point to a continuation of the uptrend, though with less momentum. ¥160 remains an obvious potential target, with the 200- and 100-day SMAs ahead as dynamic resistances. Strong oversold signals on the slow stochastic and Bollinger Bands support an ongoing bounce. The large tail on 3 August showed a clear rejection of a move below ¥157. Stark said a serious attempt through that level would probably need a weak NFP and softer inflation next week, with further intervention, however unlikely, the main risk to that view.

The July NFP is due 7 August, with the CPI release following on 12 August.