Positive US Dollar (USD) sentiment seen so far in July (which largely reflects short-covering demand after the USD’s rapid slide in the first half of the year) may be stalling out, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret note.

USD trades generally lower as bullish sentiment fades

"In the short run, comments from Fed Governor Waller, a known dove, calling for lower rates now, have helped curb the USD into the end of the week even though swaps pricing is unmoved (and effectively pricing in zero risk of an ease at the July 30th decision). More generally though, President Trump’s continued attack on Fed Chair Powell after yesterday’s better-than-expected data may be weighing more on USD sentiment. Ramping up criticism of the Fed won’t change much in the short run. Swaps pricing reflects some retrenchment in Fed easing bets for 2025 in the past couple of months, but more anticipation of Fed cuts in 2026."

"That might reflect concerns that tariff uncertainty will keep the Fed from easing rates much this year. But it might also be a manifestation of how markets see the consequences of a change in Fed leadership playing out—more aggressive easing next year as the president installs someone who shares his view on where rate policy should be. Note that the Treasury term premium has re-widened some 18bps since the start of July while US inflation swaps continue to reflect expectations of more inflation 12 and 24 months out. It is not a stretch to say that all this suggests investor confidence in the Fed’s institutional resilience is weakening while confidence in low and stable inflation is eroding as a result of the attacks on the Fed chair, none of which can be positive for the dollar’s outlook."

"On the day so far, the NOK and SEK are leading gains on the USD while the JPY is little changed and a moderate underperformer. US data releases include Housing Starts, Building Permits and U. Michigan Sentiment data. Inflation expectations may be a focus in this report. On the charts, the DXY’s July advances has slowed in the later part of this week around the 50-day MA, where dollar rebounds peaked in May and June. Intraday price action is leaning a little soft. A break under 98.0 for the index will be a short-term (at least) technical negative."