Despite the lack of positive catalysts from US economic data, the US Dollar maintains its lead due to its role as a safe haven.

The Greenback showed its sharpness ahead of the release of various important data throughout this week. The US Dollar Index (DXY) climbed around 0.5% to reach the range of 102.40s again during the New York session on Tuesday (August 1st). Meanwhile, the Greenback strengthened in USD/JPY and other major currency pairs.

DXY

There is still no clear positive catalyst from the US economic data. The ISM version of the Purchasing Managers' Index (PMI) for the US manufacturing sector missed expectations tonight. However, the US Dollar excels due to its function as a strong safe haven amidst various bad news from other regions.

The Caixin/S&P Global PMI survey on China's manufacturing sector showed a contraction for the first time since April. The score declined from 50.5 to 49.2 in July 2023, whereas the previous consensus expected a decrease to only 50.3.

This news immediately impacted high-risk assets, notably the Australian Dollar and the New Zealand Dollar. The Aussie further weakened due to the disappointing RBA announcement earlier this morning.

USD/JPY surged more than 0.75% to the range of 143.40s, still influenced by last week's changes in Japanese yield policy. EUR/USD continues to be restrained below the crucial psychological level of 1.1000. GBP/USD also weakened ahead of Thursday's Bank of England (BoE) meeting.

Current market data indicates a 60% chance of a 25 basis points interest rate hike by the BoE on that occasion. Unfortunately, recent dovish announcements by various central banks have raised concerns that these expectations may not materialize.

In his note last week, Dominic Bunning, Head of European FX Research at HSBC, pointed out a clear downside bias in GBP/USD, indicating that a stronger GBP is unlikely to occur.

He mentioned that issues of excessive valuation often persist. Still, when combined with imbalanced trading positions and signs of weakening UK economic activity and inflation, all these factors suggest that further GBP appreciation will be more challenging without exceptional economic performance.

Market participants will closely monitor a series of important data releases from the US tomorrow, including the ADP Nonfarm Employment Change on Wednesday and the US Services and Non-Manufacturing PMI on Thursday. There will also be the Non-farm Payroll data and a series of other labor market reports on Friday.