All in line with expectations. The dollar and yields are holding higher as PCE data, the Fed’s preferred inflation gauge, came in mostly in line with expectations. S&P 500 futures trimmed losses sharply after the release
US JULY PCE PRICE INDEX RISES 0.2% M/M; EST. +0.2%
US JULY CORE PCE PRICE INDEX RISES 2.9% Y/Y; EST. +2.9%
US JULY PERSONAL INCOME RISES 0.4% M/M; EST. +0.4%
Structural cracks meet tactical fog
The US dollar index is on track for its seventh monthly decline of 2025, down over 2% against a basket of majors and weaker versus 88% of the global currency basket we’re tracking. While month-end flows are muddying FX signals and the looming August payrolls report is keeping positioning light, the dollar’s appeal is eroding across multiple dimensions.
At the core is a rare convergence of structural shocks. Tariffs are dampening consumer and corporate demand, dragging on GDP. Simultaneously, immigration constraints are tightening labour supply, curbing potential output and stoking wage pressures. These twin shocks slow growth without a clear inflation offset – an environment that typically drives real rates lower.
The yield curve is twist-steepening: short-end yields are falling on rate cut expectations, while long-end yields rise amid fiscal concerns and inflation risk. That’s rarely dollar-supportive, as it signals weaker growth and eroding policy credibility. Political interference is compounding the issue, with Trump’s continued testing of the Fed’s independence undermining investor confidence in the central bank’s autonomy.
Even the latest GDP revision offers little reassurance. Q2 growth was upgraded to 3.3%, but the headline was flattered by a collapse in imports – down over 30% – which mechanically boosts GDP. Strip out trade distortions, and final sales to private domestic purchasers rose just 1.9%, pointing to more modest underlying momentum. Taken together, this trifecta of demand drag, supply constraints, and institutional fragility forms a compelling bearish thesis for the dollar – one that’s structural, not just cyclical.
The next test for the US dollar arrives today with the release of the PCE report – the Fed’s preferred inflation gauge and a key input ahead of the September FOMC meeting. If the PCE print confirms sticky inflation, markets may pare back Fed easing bets, offering the dollar a reprieve from its recent slide – at least temporarily.
Record deficit shifts focus to yields
According to Statistics Canada, the nation’s current account deficit widened to a record $21.2 billion in the second quarter, a stark increase from the previous quarter’s deficit. This shift was primarily driven by a record $19.6 billion deficit in the trade of goods and services, as exports saw their largest quarterly decline on record. Foreign investors also responded to the underlying weakness by divesting a considerable $16.8 billion from Canadian securities, representing the largest sell-off since 2007.
The primary driver of the record trade deficit was a significant drop in goods exports, which fell by a sharp 13.1%. This decline, particularly in motor vehicles and energy products, coincided with the implementation of U.S. tariffs, highlighting a direct impact on trade with its largest partner. While inflows of foreign funds were still present, they came primarily in the form of currency and deposits rather than long-term portfolio investments, which generated a significant net outflow from the Canadian economy.
Despite this fundamental weakness, the recent movement in the Canadian dollar has been more closely tied to the narrowing yield differential with the U.S. This spread, a dominant theme for the currency over the past year, has consistently held above 100 basis points, pressuring the Loonie. The recent drop to 93 basis points marks the first time in almost a year that it has fallen below this key threshold, a significant development in the currency’s dynamic. This narrowing has been a crucial factor in the USD/CAD’s recent decline, bringing it below the 1.38 level, and suggesting that yield differentials are currently a more powerful driver of price action than the current account. The CAD has now eased to 1.374, consolidating near its 50-day moving average and trading just below its 2-year average.
Strong UK data and shifting rate expectations
The pound has mounted a modest recovery, buoyed by a string of upbeat UK economic indicators and growing expectations of a more hawkish stance from the Bank of England (BoE). After tumbling nearly 4% in July, GBP/USD regained over 2% in August, stabilising between $1.34 and $1.36 throughout the month.
This rebound marks a partial reversal of the deep economic pessimism that had weighed on sterling, though it’s premature to call it a full-fledged turnaround. GBP/USD remains the most direct way to reflect short-term optimism, especially as the US dollar softens. Meanwhile, GBP/EUR could also see upward momentum, driven by rising political uncertainty across the eurozone.
Despite the improved tone, sterling isn’t out of the woods. Fiscal concerns tied to the upcoming autumn budget continue to cast a shadow, suggesting that the pound’s path forward may remain uneven.
That being said, business confidence in the UK has climbed to its highest level in nearly a decade, with Lloyds’ latest survey showing a growing majority of firms planning to hire over the next year. Despite a £26-billion payroll tax hike and a near 7% rise in the minimum wage, more than 80% of businesses say the impact on staffing plans will be limited.
Hiring intentions rose for a fourth consecutive month, and nearly a quarter of firms are offering inflation-beating pay rises of 4%, suggesting higher labour costs are being passed to customers rather than absorbed by workers. The upbeat tone aligns with S&P Global’s PMI data, which shows private sector activity expanding at its fastest pace in a year.
The figures offer political cover for Chancellor Reeves amid criticism that Labour’s first budget could stifle growth. But they also raise fresh concerns for the BoE, as resilient demand and rising wages may complicate the path toward rate cuts.
Peso’s resilience draws long bets
Throughout August, the Mexican peso has displayed remarkable stability and low volatility, largely holding its ground against the US dollar. While many major currencies experienced notable swings, the peso’s movements were subdued, losing only a marginal 0.5% against the dollar for the month. This resilience has allowed the peso to maintain its status as a top performer, preserving its significant year-to-date gains and staying near its 2025 yearly low. Alongside the Brazilian real, the peso has led gains among Latin American currencies, underscoring its appeal to investors seeking stability and higher yields in the region.
This unwavering performance is mirrored in the futures market. Recent data from the Chicago Mercantile Exchange (CME) shows that leveraged funds and asset managers have increased their net long positions in the Mexican peso against the US dollar. This speculative positioning, where a rising value indicates funds are betting on MXN strength, provides further evidence of the market’s confidence in the peso’s outlook and supports the notion that investors are seeking stability and yield in the currency.
CAD recovers on broad based US Dollar weakness
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: 25 – 31 August
All times are in ET
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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.
