Key Takeaways:
The U.S. Dollar strengthened against major peers Monday after the Institute for Supply Management's services index met expectations at 54 in June, supporting the case for the Federal Reserve to maintain its hawkish stance.
"The services data confirms the economy is still expanding at a solid clip, which gives the Fed cover to keep rates higher for longer," said James Okafor, macro analyst at Edgen.
The ISM reading matched the 54 consensus but slipped from May's 54.5, while the S&P Global US Services PMI came in at 51.2, slightly below the 51.3 estimate. "Output growth and confidence consequently remain subdued by standards seen last year," Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement. The data follows a weaker-than-expected June jobs report that showed nonfarm payrolls rose just 57,000, missing the 110,000 forecast, though the unemployment rate unexpectedly fell to 4.2 percent from 4.3 percent.
The mixed data leaves the Fed with competing signals — a cooling labor market versus still-expanding services activity — as Chair Kevin Warsh's committee prepares to release minutes from its June meeting on Wednesday. Markets price a 77.3 percent probability of a rate hike by year-end, according to the CME FedWatch tool, with the next policy decision scheduled for late July.
The Dollar Index hovered near 101.00 before edging higher after the ISM release, extending its "King Dollar" narrative as it continues to outcompete traditional safe havens. The greenback's resilience comes even as easing global inflation pressures — assisted by the resumption of normal oil shipping volumes through the Strait of Hormuz — have reduced some tailwinds for the currency.
Against major counterparts, the dollar pushed EUR/USD lower toward the 1.08 handle, while GBP/USD slipped below 1.27. USD/JPY remained pinned near 40-year highs above 161, with traders watching for potential intervention from Japanese authorities. USD/CAD extended gains as oil prices softened, with Brent crude falling below $72 a barrel after OPEC+ agreed to raise output targets by 188,000 barrels a day.
The services sector data arrives at a critical juncture for the Fed's policy path. Last week's payrolls miss had briefly cooled rate-hike expectations, but the ISM print suggests the economy retains enough momentum to keep the central bank focused on inflation. Fed Chair Warsh reaffirmed last week the committee's commitment to its 2 percent price stability target, while acknowledging that inflation expectations have finally started to decline.
The last time the ISM services index held above 54 for consecutive months was in late 2024, a period that preceded a 75-basis-point tightening cycle over the following six months. If the pattern holds, markets may need to price additional hikes beyond what is currently discounted.
This article is for informational purposes only and does not constitute investment advice.
