Fed to hold
Chair Powell is expected to stress that the Federal Reserve is in no hurry to lower interest rates, even as inflation risks resurface. Tariff-sensitive categories like auto parts and electronics are seeing renewed price pressure, and tighter immigration policies may shrink labor supply, potentially lifting wages. These developments complicate the Fed’s calculus, especially as loose financial conditions, resilient equity markets, tight credit spreads, and ample liquidity, suggest that policy may not be biting as intended. While some officials view softening data as grounds for preemptive easing, others remain wary that inflation could reaccelerate before the job is done. FOMC members Bowman and Waller have been vocal in backing cuts, with Waller’s assertiveness drawing attention to his growing influence within the committee.
Policymakers broadly agree that rate cuts are coming, but the debate now centers on timing and levels. Earlier in the year, the FOMC paused amid concern that tariffs might trigger another inflation spike. Since then, price effects have been muted and hiring momentum has cooled, leading to a splintering of views. Powell’s press conference will be key in shaping near-term expectations. While he’s unlikely to offer a clear signal for September, remarks from Fed officials in the coming days may lay the groundwork for a broader shift, either toward earlier action or deeper caution.
BoC to hold
Governor Tiff Macklem and the Bank of Canada enter their meeting navigating an unusually opaque policy landscape. While domestic inflation has moderated, goods tied to trade policy, such as vehicles and machinery components, are showing renewed price pressure. At the same time, weaker global demand and uncertainty surrounding U.S. tariffs complicate forward-looking assessments. Macklem has indicated comfort with patience, but behind that stance is a growing recognition that soft wage growth and modest consumer activity may not be enough to offset upside risks. The Bank is poised to hold rates, not out of confidence, but caution in the face of deteriorating clarity.
Market participants will parse the tone more than the action. The Canadian dollar has remained resilient, and labor market data isn’t deteriorating sharply enough to force immediate cuts, yet the Bank’s emphasis on data dependency leaves the door open. Should Macklem frame trade tensions as an active threat to growth, or highlight future downside scenarios, expectations for a September pivot might open.
As USD end-of-month momentum persists, CAD has broken above its 60-day moving average and approached the two-month high of 1.3798, though it remains below the key level for now. A Macklem leaning toward inflation concerns could lift CAD further, potentially triggering a break above 1.38. A neutral tone may cap upside and shift focus to afternoon trading as Powell’s presser begins. Another hawkish Powell showing could add fuel to USD/CAD’s rally. However, all else equal, short-term momentum appears overbought, with consolidation likely until week’s end when payrolls and tariff announcements hit the headlines.
Pause or pivot for the euro?
EUR/USD started the week under intense pressure following a trade deal between the US and EU that, while avoiding escalation, offered little relief for Brussels. Terms largely favour the US, with 15% tariffs on most EU goods and promises of additional investment and commodity purchases. Mixed messaging from key leaders has added uncertainty. Although euro losses reflect disappointment, the longer-term damage may be skewed toward the US economy though. With the highest average tariff rates since 1936, inflation and growth risks there are mounting.
Still, the short-term reaction has been eye-catching. EUR/USD has dropped well over 1.5% since the deal, and traders are rotating back toward the dollar as monetary policy comes back into focus. Macro fundamentals now drive the narrative. The US economy is expected to have grown 2.4% in Q2, with core PCE holding at 2.7%. Europe, by contrast, looks stagnant, with flat GDP and CPI slipping below 2%. This divergence supports the dollar, especially as the historic link between US front-end yields and dollar strength reasserts itself after trade-induced volatility earlier in the year. Moreover, the euro’s haven-like behaviour throughout 2025 has also made it vulnerable to reversal now that trade tensions have moderated.
However, despite the recent selloff, structural support for the euro remains. Monday’s 1.3% dip may mark a clearing of stretched positions rather than a fundamental shift. The recent surge in EUR/USD was the strongest six-month gain since 2003, so it was bound to come to an end. But back in 2003 also saw a correction before a multi-year rally resumed.
Additionally, looking back at Trump’s first term and EUR/USD price action vs. his second term, the convergence holds for now. History doesn’t repeat, but it often rhymes, suggesting this may be a pause, not a pivot – and with global trade frictions likely to weigh more heavily on the US over time, the longer-term euro outlook could remain positive.
GBP/USD slips to two-month Low
GBP/USD dropped for the fourth consecutive session yesterday, hitting a two-month low of 1.3308 and briefly breaching the 100-day moving average. The pair had held confidently above this level throughout H1, making the recent slide significant. A close below this key average would open further downside potential.
As of yesterday, the pair has continued to struggle breaching a newly formed resistance at 1.3360, leaving the 100-day MA just a few pips underneath at 1.3337. If resistance holds, a retest of support at the moving average becomes increasingly likely, particularly if resilient U.S. macro data dominates—a possibility given the relatively light UK data calendar this week.
A confirmed close below the 100-day MA will pave the way toward the May low at 1.3140.
On the macro front, the UK economy continues to show signs of stagflation – a toxic mix of sluggish growth and persistent inflation. Despite being better shielded than the EU on the trade front this week, Monday’s retailing report revealed a tenth consecutive monthly decline in sales. Meanwhile, the Shop Price Index jumped to 0.7% yesterday, significantly above the 0.3% forecast – highs not seen since in over a year.
This stagflationary environment adds preassure to the Bank of England’s next steps, with expectations for a 25 basis-point rate cut currently priced in with over 93% probability.
GBP and EUR continue the bleeding
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: July 28-August 01
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.
