Written by the Market Insights Team
Familiar headwinds on summer’s closure
Kevin Ford
Investors returning from summer break will find the market picture remains largely unchanged, with a familiar mix of tensions continuing to shape the landscape. The dollar remains under downward pressure, a trend fueled by a steepening U.S. yield curve and growing expectations of Federal Reserve easing. President Trump’s ongoing criticism of the Fed and concerns about the central bank’s independence have not only stayed but intensified. Meanwhile, legal challenges to the administration’s tariffs have resurfaced. Against this backdrop of political and economic friction, U.S. equity markets have continued their remarkable ascent, with the S&P 500 hovering near historic highs. This week, these three key themes will influence market dynamics, but none will loom larger than Friday’s non-farm payrolls report.
- The tariff legal battle
A significant legal challenge to the Trump administration’s trade policy has advanced. A recent ruling by the Court of Appeals for the Federal Circuit dealt a blow to the use of tariffs under the International Emergency Economic Powers Act (IEEPA). In a 7-4 decision, the court determined that the statute does not grant the President the authority to impose the reciprocal or “fentanyl trafficking” tariffs he had implemented. The judges noted that the law lacks specific language for tariff authority and procedural safeguards.
The ruling has been stayed until October 14 to allow for an appeal to the Supreme Court, a move widely anticipated by both the administration and legal observers. This sets the stage for a high-stakes legal confrontation over the separation of powers and the extent of the President’s authority versus that of Congress. While lower courts have consistently ruled against the President’s actions, the Supreme Court’s conservative majority could potentially influence the outcome.
- The payroll puzzle
At the Jackson Hole meeting, Federal Reserve Chair Jerome Powell signaled a potential shift in monetary policy, opening the door for a September rate cut. His speech adopted a more dovish tone, focusing on the full employment aspect of the Fed’s mandate and downplaying price stability concerns. However, this stance may be premature, as recent data has shown two consecutive months of elevated core inflation, driven by persistently high service sector prices, not tariffs.
However, a September rate cut is not a foregone conclusion. Upcoming data releases, including the next employment report, will provide further clarity. As focus shifts to the job market, will this Friday report validate Powell’s change of tone? A weak jobs report could put downward pressure on the dollar, as it would highlight a policy divergence with other central banks, particularly with the Bank of Japan. It’s likely that the BoJ will hike rates in October, and with the Fed potentially in easing mode, could put more pressure on the Dollar.
- Market disconnect
A sense of disconnect prevails in the markets, or, depending on your perspective, a blend of complacency, underlying strength, or simply fatigue with the ongoing political theatrics. It’s a striking chasm between current macro risks and the unwavering resilience of financial markets.
Despite the persistent threats to the Fed’s independence from the administration, the full ramifications of which the market appears not to fully comprehend, and the economic fallout from tariffs, which thus far have been more sectoral, the market has demonstrated a remarkable tolerance for this political and economic friction.
For the time being, markets seem to be largely shrugging off these risks. Investors are positioning themselves with a short dollar bias, anticipating a weak August jobs report. This sentiment could keep things relatively unchanged in the markets, with the current trend potentially extending beyond mid-September. The S&P 500 is near historic highs, the fear index, the VIX, has dropped below 15, rates volatility is at its lowest level since early 2022, and credit spreads are extremely tight. This calm in the face of macro uncertainty suggests that the only thing that could derail current sentiment is a significant miss in the August report, accompanied by a strong downward revision to previous months.
GBP/USD is down 1%, why?
George Vessey
Why is the pound falling this morning? The only real catalyst is the one that’s been in the shadows this year, and one we’ve warned multiple times would cap sterling upside and could start to weigh heavy if investor sentiment switched.
Long-end gilt yields rising to highest since 1998
In normal times, rising yields would typically support a currency via the rate channel. But these are far from normal times for the UK economy. Benchmark 30-year gilt yields have surged to their highest levels since 1998, climbing roughly 40 basis points since July, as markets grapple with the government’s looming £51 billion fiscal gap.
This widening deficit is forcing uncomfortable questions about how Chancellor Rachel Reeves will balance the books. If the gilt sell-off deepens, she may be compelled to offer clarity well before the autumn budget is unveiled. The challenge is steep: internal party tensions are mounting, and fresh tax hikes or spending cuts may be unavoidable.
There may be a brief reprieve later this month. The Bank of England’s September 18 policy meeting is expected to include a review of its bond-selling pace. Governor Andrew Bailey has already flagged concerns about illiquidity and the steepening yield curve, hinting that the BoE could slow its quantitative tightening to ease pressure on long-end gilts.
Still, come October, attention will shift squarely back to fiscal policy. Until markets get definitive answers, longer-dated gilts are likely to remain under pressure. The 2y/30y yield curve has already quadrupled since last year’s budget, and with uncertainty lingering, that steepening trend looks set to continue – keeping sterling on the defensive.
The risk hasn’t gone away, and ahead of the autumn budget – this is one theme that we need to keep a close eye on.
Remember – this is something that we’ve covered throughout the year – think the decoupling from rate differentials back in Q1.
Tariffs take a toll on Canada’s GDP, boosting rate cut odds
Kevin Ford
According to Statistics Canada, the Canadian economy showed significant areas of weakness in the second quarter of 2025, with real GDP declining by 0.4% after a 0.5% gain in the first quarter. The contraction was primarily driven by a sharp drop in exports of goods and decreased business investment in machinery and equipment. These negatives were only partially offset by stronger household spending, government spending, and increased business inventories. On a per-capita basis, real GDP also fell, signaling a broader decline in economic well-being for Canadians.
The most prominent area of weakness was a significant 7.5% decline in exports of goods, which makes the impact of tariffs clear as day. This was a direct result of US-imposed tariffs, which led to a dramatic 24.7% plummet in the international export of passenger cars and light trucks. Other affected sectors included exports of industrial machinery and travel services. Businesses responded by absorbing some of the additional costs of tariffs by lowering prices, causing both export and import prices to fall. This led to a 1.1% decrease in Canada’s terms of trade, further highlighting the economic strain.
Beyond exports, tariffs also directly hit business investment. Total business investment fell by 0.6% in the second quarter, led by a stark 9.4% contraction in investment in machinery and equipment. This marked the slowest pace for this type of investment since the end of 2016, excluding the pandemic year of 2020. This indicates that businesses are hesitant to invest in new capital in the face of ongoing trade uncertainty, a clear signal of diminished confidence. The decline in business investment in non-residential buildings also contributed to the overall slump.
This annualized drop in GDP is close to what the Bank of Canada had anticipated in one of their “current tariff” scenarios outlined in their July monetary policy meetings. The weakness in the economy, which was much more pronounced than many had anticipated, has significantly increased the probability of an interest rate cut. Given the data, market odds of a rate cut by the Bank of Canada have increased to 56%, as a cut would be seen as a way to stimulate a sputtering economy that is clearly feeling the effects of the trade conflict. The job report for the month of August will further provide the BoC more clarity for the September monetary policy meeting.
EUR/USD breaks north of 1.17 – but can it hold?
Antonio Ruggiero
EUR/USD kicked off the week on a strong note, with the euro gaining approximately 0.4% against the dollar during Asia trading hours before paring back some of those gains later on. The move was largely dollar-negative, as the greenback was weighed down by a federal appeals court ruling over the weekend that deemed President Trump’s universal tariffs illegal.
However, the court also ruled that the tariffs can remain in place for now, which helped soothe market nerves. As a result, this development is unlikely to trigger a major market reaction. Instead, attention remains firmly on US macro data, particularly Friday’s Non-Farm Payrolls (NFP) report. While the labour market is expected to show slight improvement, the broader picture remains gloomy – with August likely to mark the fourth consecutive month in which the US adds less than 100,000 jobs – offering support to the euro.
Domestically, eurozone unemployment ticked down to 6.2%, reinforcing the view that the region’s economy remains resilient amid global uncertainty. A robust labour market is aiding a modest domestic recovery and may deter further ECB easing this year. In fact, trade negotiations now appear to be the sole factor that could justify an “emergency cut,” should talks escalate without a clear deal in place.
Among ECB officials speaking yesterday, Isabel Schnabel’s remarks stood out, echoing themes from Powell’s Jackson Hole address. She warned that structural forces – such as labour scarcity, climate change, and geopolitical fragmentation – have permanently elevated inflation risks. Schnabel implied that monetary policy may need to remain tighter for longer, as the neutral rate is no longer as low as it was in the 2010s.
EUR/USD broke above August’s broad range of 1.16–1.17, but quickly re-approached resistance. A more substantial catalyst is needed to sustain the breakout, and this week’s US labour data – starting with Wednesday’s JOLTS report – could provide just that.
Dollar remains about 10% lower YTD
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 1-5
All times are in EST.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
