The DXY dollar index confidently broke through the 107.00 mark on Friday, and today DXY futures are traded (at the time of publication of this article) near the 107.62 mark, maintaining positive dynamics and potential for further growth. Breakdown of the next "round" mark of 108.00 will be a signal to increase long positions in DXY futures with the prospect of growth towards multi-year highs of 121.29 and 129.05, reached, respectively, in June 2001 and November 1985.
Markets are also keeping a close eye on US Treasury yields. If it (yield) grows, then the USD will continue to grow. And the increase in the yield of US bonds is promoted, in turn, by the Fed's monetary policy, which tends to further tighten.
So, last week, Fed Board member Christopher Waller announced the need for another increase in interest rates by 75 percentage points this month and by 50 percentage points in September, after which the pace of interest rate hikes can be reduced to 25 percentage points. In his opinion, inflation is a tax on economic activity, and the higher it is, the more it suppresses it.
Earlier, the head of the Fed, Jerome Powell, also spoke about the undesirability of high inflation in the United States. In his opinion, the fight against high inflation is the main goal of the Fed, and the risks of recession in the national economy, in his opinion, remain low.
As follows from the minutes of the June meeting of the Open Market Committee (FOMC) published last Wednesday, the Fed will raise rates by 50 or 75 basis points in July. It also say that high inflation justifies "restrictive" interest rates, with the possibility of a "more restrictive stance" if inflation continues at high levels.
St. Louis Federal Reserve Bank Governor James Bullard also last week supported a more aggressive tightening of the Fed's monetary policy, noting the desirability of a key interest rate level of 3.5% this year.
Last Friday, the dollar received additional support from the publication of very positive data from the US labor market. The US Department of Labor report pointed to an increase in the number of new jobs outside the agriculture sector by 372 thousand, while the unemployment rate remained at a minimum of 3.6% for the 4th month in a row.
The data speaks of the stability of the US labor market, which allows the Fed to continue the fight against rising inflation in the country. Data from the labor market (along with data on GDP and inflation) are known to be key for the Fed in determining the parameters of monetary policy.
As for the news this week, investors will pay attention to US inflation data for June and the Fed's monthly economic report (Beige Book). Economists expect the consumer price index in June to accelerate from 8.6% to 8.8% (in annual terms), updating record highs, although the growth of the Core CPI in June slowed slightly (to 5.8% from 6.0% in May, in annual terms). On Friday (at 12:30 GMT) US retail sales are expected to rise in June (+0.8% vs. -0.3% decline in May), which is also a positive factor for dollar.
The other major dollar strengthening factors (global risk aversion and recession fears) are likely to continue in the near term as well.