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- DXY struggles to capitalize on the previous day’s solid recovery move from mid-June lows.
- The US-Iran uncertainty keeps the geopolitical risk premium in play and acts as a tailwind.
- Fed rate hike bets further lend support to the buck as bulls await the US NFP report on Friday.
The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, struggles to capitalize on a modest Asian session uptick and currently trades around the 100.00 psychological mark, nearly unchanged for the day. The index, for now, seems to have stalled the previous day’s solid recovery move from its lowest level since mid-June, though the fundamental backdrop warrants some caution for bearish traders.
The optimism over a potential US-Iran peace deal faded rather quickly after Iran said on Monday there were no talks underway with the US and no plans for any meetings. Meanwhile, US President Donald Trump had cited resumption of negotiations as justification for calling off attacks over the weekend. Adding to this, unconfirmed reports of drone strikes on US assets in Kuwait prompt traders to again price in the geopolitical risk premium, which, in turn, is seen offering some support to the safe-haven US Dollar (USD).
Meanwhile, Mohsen Rezaee, a senior military adviser to Iran’s Supreme Leader, said that Tehran will not permit any shipping route through the strategic waterway other than the one designated by the Islamic Republic. Rezaee further warned that US vessels and forces could face serious risk and casualties if the standoff over the strategic waterway continues. This lends some support to crude oil prices, reviving inflation fears and keeping bets for at least one rate hike by the US Federal Reserve (Fed) firmly on the table.
Adding to this, data released on Monday showed that US manufacturing sector activity increased to the highest level in more than four years in July. In fact, the US ISM Manufacturing PMI rose to 55.6 last month from 53.3 in June, surpassing consensus estimates. This reaffirms hawkish Fed expectations, validating the near-term positive outlook for the DXY. Traders, however, might refrain from placing aggressive bets and opt to wait for the release of US employment details, or the Nonfarm Payrolls (NFP) report, due on Friday.
