Key Takeaways
- The Fed held rates, causing the dollar to drop about 0.7% as G10 currencies recovered, but the rationale behind the decision remains unclear.
- Fed futures still price in potential hikes by October, reflecting a delay rather than a cancellation of tightening expectations.
- CAD lagged behind the dollar’s selloff, struggling to gain as local conditions and lower oil prices tempered its response to the Fed’s decision.
- US consumers continue to show resilience, with growth in personal income and spending, while inflation remains a focus for future Fed actions.
- Market conditions are fluid, with bond yields affecting mortgage and credit costs, putting pressure on the Fed to manage expectations without direct actions.
Fed meeting: Dollar blinks as bonds bite
The Fed held rates, and Chair Warsh gave markets a lot to think about without giving them much to trade on. He explained the Fed’s process, defended the 2% inflation target, praised the economy’s resilience and pushed back against the idea that uncertainty means confusion. Investors still left without a clear answer on why the Fed paused today, what would trigger a September hike, or what Warsh plans to say at Jackson Hole. For the dollar, the missing signal was the signal.
That explains the first move in FX. The front end rallied after the Fed skipped the hike, dragging the dollar down roughly 0.5% and giving G10 currencies room to recover. The Fed held the target range at 3.50%–3.75%, described activity as expanding at a solid pace, and pointed to strong productivity growth and capital investment. The decision was not unanimous, with Hammack, Kashkari and Logan dissenting in favour of a 25bp hike.
But hike expectations were delayed, not destroyed. Fed funds futures are still pricing roughly 0.65 of a hike by September, almost 0.90 by October, and more than one full hike by December. Investors have stopped chasing an immediate tightening story, but they are not saying the Fed is finished. The dollar is trading the front-end relief. The rates market is trading the risk that inflation keeps the Fed on the hook.
The long end is where the message turns more hostile. Warsh insisted that inflation expectations remain anchored and that the Fed’s job is to keep them centred around 2%. The bond market was less convinced. The US 30-year real rate is hovering near 2.99%, testing levels last seen around the 2008 financial crisis. After more than five years of above-target inflation, investors are not handing the Fed credibility for free.
That is where Warsh’s communication strategy gets risky. He wants the Fed to make decisions without spoon-feeding markets, and he does not sound worried about losing control of the narrative. But fixed income markets can take control quickly, especially at the long end. The UK gilt crisis remains the obvious warning label: when long-end yields revolted, policy had to reverse and Liz Truss was gone in 45 days. The US is not the UK, but higher long-end yields still feed directly into mortgages, corporate credit, equity valuations and public borrowing costs.
There is a more dovish interpretation. If real yields are driving the long end higher, financial conditions are already tightening without another Fed hike. Warsh may be comfortable holding the policy rate steady while bond markets do some of the heavy lifting. That is the modern twist on Mervyn King’s Maradona theory of interest rates. King noted that just as Diego Maradona beat five English defenders by running in a straight line, simply because they anticipated a swerve, a central bank can tighten financial conditions purely by shaping market expectations, without actually moving rates.
AI capex is the swing factor. Warsh praised the growth impulse from strong business investment and AI spending, but he also admitted the supply-side payoff remains hard to time. If hyperscaler investment keeps demand firm before productivity gains show up in the inflation data, the Fed could face a tougher choice later. If inflation broadens, or if the supply side takes too long to catch up, letting the bond market tighten financial conditions will not be enough.
So the dollar’s selloff is real, but it is not a clean bearish break. The Fed skipped the hike, gave no September steer, and allowed the front end to rally. That was enough to knock the dollar lower. But the curve is still pricing action by October, and the long end is questioning whether the Fed can stay patient while inflation remains above target. If Warsh loses the bond market, the Maradona theory stops working, and things get messi.
US Macro: Consumers keep the expansion moving
A batch of key macro data was just released. US income growth cooled in June, but consumers did not pull back. Personal income and disposable income both rose 0.2%, while personal spending increased 0.3%. Services did most of the work, rising $58.2 billion, with goods spending adding $7.0 billion. Real Personal spending also rose 0.4%, which shows demand held up after a strong May.
The inflation side of the report was easier to digest. The PCE price index fell 0.1% in June, while core PCE rose just 0.1%. The yearly numbers are still elevated, with headline PCE at 3.7% and core PCE at 3.3%. Even so, the softer monthly print gives markets some room to breathe.
The GDP report told a similar story, though the headline was softer. Real GDP grew 1.5% annualized in Q2, down from 2.1% in Q1. Under the surface, demand looked better, as real final sales to private domestic purchasers climbed 3.9%. That pickup came from stronger consumer spending and business investment.
Taken together, the data point to an economy that is holding up with the momentum seen in Q1. Households are still spending, although the saving rate slipped to 2.7%. For the Fed, the data doesn’t change much of the thought process. Core PCE remains elevated and markets will remain focused on the inflation prints coming up in August, as they learn how to “play the ball, not the referee” according to Warsh’s remarks yesterday. For markets this is enough inflation left to keep policy patience in play, and bond markets under stress around key macro developments coming forward.
CAD lags the Dollar selloff
USD/CAD did not fully join the broader G10 rally after the Fed. The US dollar fell around 0.7% after the no-hike, no-guidance message, but CAD gained only about 0.4%, leaving it behind most peers. USD/CAD is still hovering near 1.404, up roughly 0.4% over the past couple of sessions, which shows the pair is not simply trading the broad dollar move. The Fed gave G10 FX room to recover, but the loonie’s response has been more restrained.
That reflects the local setup. Lower oil prices have removed an obvious source of CAD support, while US-Canada rate spreads continue to lean against a deeper USD/CAD pullback. The Fed may have taken immediate hike risk out of the dollar, but markets are still pricing another move by the fall, keeping short-end rate support alive. For USD/CAD to break lower with more conviction, the front-end rally in Treasuries likely needs to extend, oil needs to stabilize, or Canadian data need to give investors a reason to cover CAD shorts more aggressively. Right now, CAD is timidly participating in the post-Fed dollar fade ahead of tomorrow’s GDP print for the month of May.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: July 27-31
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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.
