**US Dollar Forecast: Rebounds on Weak Jobs Data and Fed Cut Bets – GBP/USD and EUR/USD Analysis**
*Adapted and expanded from an article by James Hyerczyk, FX Empire.*
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**Overview**
The US Dollar experienced a significant rebound as weaker-than-expected employment data fueled expectations of Federal Reserve interest rate cuts. This shift sent ripples through the foreign exchange markets, influencing the GBP/USD and EUR/USD currency pairs as traders evaluated the likelihood and timing of monetary policy adjustments. The following in-depth analysis explores the key drivers behind the US Dollar’s movement, the impact across major currency pairs, and the potential outlook as central bank policies continue to shape the forex landscape.
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**US Dollar Index Rebounds on Weak Jobs Data**
Recent trading sessions saw the US Dollar Index (DXY) rebound after the release of disappointing US labor market data. The Federal Reserve’s stance, alongside macroeconomic indicators, has intensified the market’s focus on the likelihood of forthcoming rate cuts.
**Key Details from the Latest US Jobs Report:**
– The US economy added 206,000 jobs in June, according to the non-farm payrolls report. This marginally exceeded the market forecast of 191,000 jobs.
– Notably, figures for May and April were revised downward by a combined 111,000 jobs, indicating weaker employment growth than previously believed.
– Wage growth decelerated, with average hourly earnings rising 3.9 percent year-on-year, compared to expectations of a 4.1 percent increase.
– The unemployment rate ticked up to 4.1 percent, surpassing both the previous month’s rate and economists’ projections.
**Market Reaction:**
– Yields on US Treasury bonds fell significantly, with the benchmark 10-year yield approaching two-month lows, as investors bet on imminent policy easing by the Fed.
– The US Dollar initially weakened after the jobs data, but quickly found support and rebounded. Investors pivoted to the view that weaker labor momentum would fast-track cuts, supporting the greenback via rate differentials.
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**Federal Reserve Rate Cut Expectations Surge**
After the jobs data, markets swiftly re-priced their expectations for Federal Reserve action.
**Shifts in Rate Cut Expectations:**
– Traders now anticipate the first 25-basis-point interest rate cut by the Federal Reserve at the September policy meeting.
– According to CME FedWatch Tool, the probability of a September rate cut soared above 75 percent.
– Futures markets also factor in a greater than 60 percent chance of a second rate cut in December, with some investors even speculating on a possible third cut, depending on incoming economic data.
**Federal Reserve Commentary:**
– Several Federal Reserve policymakers indicated that persistent labor market softness and continued progress toward the 2 percent inflation target would be needed before cutting rates.
– However, minutes from recent meetings reveal increasing debate within the committee about the appropriate timing for policy loosening.
**Economic Backdrop:**
– US inflation has moderated, but not yet reached the Fed’s 2 percent goal. With wage growth slowing, policymakers are turning their attention to signs of labor market slack as justification for easing.
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**Impact on GBP/USD and Outlook**
The British Pound initially rallied against the US Dollar following the US jobs data, but relinquished most of its gains as the Dollar index rebounded. The recent UK parliamentary election outcome, which saw the Labour Party win a decisive majority, added another layer of complexity to the GBP/USD dynamic.
**Key GBP/USD Drivers:**
– The GBP/USD pair touched an intraday peak above 1.2800 after the jobs data was released but subsequently retreated to the 1.2760-1.2770 area.
– The rise and fall were driven by shifting rate spread expectations, with traders initially favoring the Pound on Fed cut prospects, but then reassessing as the Dollar’s yield advantage remained intact.
– Political stability in the UK under Labour’s leadership, coupled with
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