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Without a doubt, the defining theme for the month of July has been the greenback’s rampage higher. The USD index, which represents the value of the US Dollar against a weighted basket of the world’s most important currencies, rose from 79.75 at the start of the month to 81.25; while a roughly 2% move over the course of month may not sound particularly impressive, the broad-based rally has taken the dollar index to its highest level since February and led a plethora of major breakouts in the forex market.

From a fundamental perspective, the strength in the US dollar has been driven by multiple factors. One of the most straightforward themes has been persistent improvement in key US economic data. Jobs data has been stellar of late, with the widely-watched Non-Farm Payrolls report showing that over 200k jobs have been created in each of the last five months, the first time that’s happened since 1999. Meanwhile, inflation has been quietly edging up toward the Fed’s target, causing some traders to speculate that the central bank is behind the curve and may have to raise rates sooner than the market currently expects. Based on the recent rally in US 2-year treasury yields over the last week, it’s clear that traders are starting to acknowledge this possibility.

Another storyline supporting the buck is the lack of alternatives. The ECB is considering outright quantitative easing amidst continued low inflation (a step the BOJ has already taken), while both the BOE and RBNZ poured cold water on bulls’ hopes last week, leaving few alternatives for traders looking to invest in a currency with a more hawkish central bank.

It remains to be seen whether these factors will continue to support the greenback as we head into August, but the most immediate concern for USD bears is that the rally could easily accelerate over the next 24-72 hours. We’re heading into arguably this summer’s most action-packed week from a fundamental data perspective, with ADP, Advance GDP, a Federal Reserve statement, and of course, NFP all on tap over the next 24 hours. Expectations are elevated heading into these reports, so there is a high hurdle for the US economy to clear, but even if the data comes in near expectations (ie. 200k+ on ADP and NFP, 3.0%+ on GDP, and another $10B taper from the Fed), the dollar rally could still have legs.

Strap your seatbelts – the economic data over the next 72 hours may set the tone for the rest of the summer!

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