Why Lloyds Thinks the US Dollar Rally Has Further to Run

The bank's call is not a consensus view. Some forecasters argue the dollar rally is overdone, pointing to a potential slowdown in US growth later this year. Lloyds counters that the data so far – retail sales, industrial production, jobless claims – has not shown the cracks that would force the Fed to pivot. Until it does, the dollar's yield advantage stays intact.

For traders watching the EUR/USD profile, the key level is the $1.07 handle. A break below that would open a run toward the $1.05 area, where the pair traded before the Fed's pivot expectations built up earlier this year. On the upside, a move back above $1.09 would require either a sharp deterioration in US data or a hawkish surprise from the ECB. Lloyds sees neither as likely in the near term.

The next scheduled test is the July US jobs report, due in the first week of the month. A strong print would reinforce the Fed's hawkish stance and give the dollar another leg up. A miss would revive the rate-cut debate and test the Lloyds thesis. Until then, the bank's view is that the path of least resistance for the dollar is higher.

For a broader look at how the dollar's strength is shaping currency markets, see the forex market analysis page.