Written by the Market Insights Team<\/p>\n
Collision course<\/p>\n
Kevin Ford \u2013 FX & Macro Strategist<\/p>\n
The recent rise of political interference in the U.S. is a cause for concern. While we\u2019ve grown used to erratic trade policy and on-again, off-again threats to the Fed\u2019s independence, the current challenge to data integrity feels like a different world entirely. And things could only get worse. The recent resignation of Governor Kugler from the FOMC board, with motivations unclear, means whoever is nominated to replace him will likely add to the dovish dissents, pushing for rate cuts.<\/p>\n
This brings up a key question: after last week\u2019s disappointing job report, is a September rate cut a done deal? The Fed\u2019s dual mandate has become as complex as it can get. On one hand, following the downward payrolls revision, the three-month moving average for job growth is down to just 35,000, a steep drop from over 125,000 last month. However, the U.S. jobless rate, despite these revisions, is roughly at the same level as a year ago. Furthermore, jobless claims, after rising to 250k in early June, settled back down to 215k in July. This suggests that while the labor market is creating jobs at the lowest levels since the pandemic, the unemployment rate, which the Fed and Powell watch closely, isn\u2019t ringing alarm bells yet.<\/p>\n
On the other side of the equation is inflation. Chair Powell not only believes that tariffs will cause a one-time price shock, but he seems determined to prevent any second-order effects. As mentioned throughout the year, I think he wants to leave a legacy like Volcker, not Burns. He understands the mistake of labeling the 2021 inflation spike as \u201ctransitory\u201d and knows his job is not yet done. This task is made even more complicated by the tariffs. The level of intrusiveness from the U.S. administration, which has assumed that statistics are politically biased, takes the challenge to another level.<\/p>\n
Powell now finds himself fighting on two fronts. He\u2019s dealing with the political pressure to cut rates, which he might have gotten used to. After his hawkish presser last week, it seemed he was clearly on top, successfully resisting the pressure. But now, what about the confidence he, the Fed, the economy, markets, and other institutions will have in macro data going forward? It\u2019s ironic that questions about credibility and integrity are being raised at this particular moment. The downward revision to the jobs data was one of the largest in history since the 1960s, so perhaps a questioning of the methodology is warranted. But what happens now? What if the August payrolls report reaffirms that the cooling off of the economy is real? And what if goods inflation in July comes in hot, as economists expect, due to tariffs? Will that be enough to keep the administration from questioning macro statistics?<\/p>\n
Or what if the numbers bounce back? Will we have to assume from now on that numbers are \u201crigged\u201d if a person aligned with the U.S. administration is in the Bureau of Labor Statistics? It\u2019s truly surreal to have to second-guess the integrity of upcoming U.S. data, especially at such a pivotal moment. After three consecutive years of wrong recession calls, we might finally be facing a genuine cool-down that will test the soft-landing narrative. We might finally see the \u201creal economy,\u201d not just the world of the Mag-7 and the AI boom with its athlete-type salaries, run into real trouble.<\/p>\n
Back in 2019, in an interview with ABC, when he was asked about the Mueller report, President Trump said that if he had the chance, he would never fire anyone, referencing Richard Nixon\u2019s experience and how it \u201cdidn\u2019t work too well for him.\u201d I\u2019m not sure this will work for him now, and of all the missteps this year alone, this one could backfire really badly.<\/p>\n
One thing is certain: volatility in the currency markets is coming. This start of the week has been relatively calm. After Friday\u2019s U-turn, when the dollar gave up 1.2% of its 3.2% gains from July after the jobs report, markets have stabilized. With a relatively quiet week on the macro data front, markets will likely move sideways for now, but the calm may not last. Coming on August 12, the July CPI report is arguably the most important piece of macro data we\u2019ll see this month.<\/p>\n
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Sentiment wobbles but euro holds firm<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
Last Friday\u2019s dramatic EUR\/USD rally \u2013 up over 1.5% \u2013 was a clear signal that the euro remains the go-to alternative for global investors seeking to diversify away from the dollar. The surge followed a trifecta of shocks: dismal US labour data, the firing of BLS Commissioner, and rising expectations of a Fed rate cut in September.<\/p>\n
The world\u2019s most traded currency pair is currently hovering near its 50-day moving average at $1.1550, after rebounding from support at $1.1377, which aligns with the 100-day average. However, Monday\u2019s release of the August Sentix Investor Confidence Index threw cold water on bullish momentum. The index plunged to -3.7, reversing July\u2019s +4.5, with the Current Situation sub-index falling to -13.0 and Expectations slipping to 6.03. This marked the first negative print in four months and reflected widespread disappointment over the EU\u2013U.S. trade deal.<\/p>\n
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Relative Strength Index (RSI) readings suggest EUR\/USD remains in neutral territory, with bulls hesitant to commit. A decisive break above $1.1600 could open the path toward $1.1700, but conviction is lacking amid mixed macro signals.<\/p>\n
Meanwhile, Switzerland is grappling with a trade shock of its own. The U.S. slapped a 39% tariff on Swiss exports last week, blindsiding officials who had expected a 10% rate following months of negotiations. The move followed a reportedly tense phone call between President Trump and Swiss President Karin Keller-Sutter, and has sparked fears of recession, especially in export-heavy sectors like luxury goods and engineering.<\/p>\n
Swiss CPI remains near 0% year-on-year, and the tariffs are expected to deepen disinflationary pressures. EUR\/CHF has begun to march higher in response, but any last-minute deal before the August 8 deadline could reverse that move. A sustained rally in EUR\/CHF likely hinges on confirmation that the ECB\u2019s easing cycle is complete \u2013 something markets may not know for certain until 2026.<\/p>\n
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Traders dial back GBP bearish bets<\/p>\n
George Vessey \u2013 Lead FX & Macro Strategist<\/p>\n
Risk reversals are a measure used in currency options markets to gauge sentiment. They compare the price of put options (bets on a currency falling) to call options (bets on it rising). If puts are more expensive than calls, it signals bearish sentiment; if calls are pricier, it suggests bullish expectations.<\/p>\n
Ahead of Thursday\u2019s Bank of England rate decision, where a quarter-point cut to 4% is widely expected, options traders have pared back short-term bearish bets on the British pound. One-week GBP\/USD risk reversals edged up to 0.15% in favour of puts, while one-month risk reversals rose to 0.34%, both nearing parity and marking the least bearish positioning since July 25. This shift reflects a more balanced outlook, as traders anticipate a cautious BoE stance amid sticky inflation (3.6%) and rising unemployment (4.7%). While a cut this week is almost certain, economists are divided on the path ahead: some expect one or two more cuts this year, potentially bringing rates to 3.75% by December, while others believe this could be the final move in the current cycle.<\/p>\n
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In the spot market, GBP\/USD is hovering just below $1.33, rebounding from last week\u2019s low of $1.3142 amid a revived \u201csell America\u201d theme that has weakened the dollar. However, the pair is struggling to break above its 100-day moving average, while the 21-day moving average remains downward-sloping \u2013 signalling lingering technical resistance and a cautious outlook.<\/p>\n
GBP\/EUR is grappling with the \u20ac1.15 handle, currently trading around \u20ac1.1495\u2014a cent below its 5-year average and three cents beneath its 2024\u20132025 average of \u20ac1.18. With rate differentials increasingly favouring the euro and volatility likely to support the liquid common currency, the outlook for sterling remains pressured. Unless UK growth surprises to the upside or inflation proves stickier than expected, sterling may struggle to regain ground against the euro in the coming months.<\/p>\n
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GBP\/EUR trading below all key moving averages<\/p>\n
Table: Currency trends, trading ranges and technical indicators<\/p>\n
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Key global risk events<\/p>\n
Calendar: August 4-8<\/p>\n
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All times are in BST<\/p>\n