Fed under fire again
Renewed political pressure on the Federal Reserve (Fed) is unsettling markets and risks weighing on the US dollar. President Trump’s call for Governor Lisa Cook to resign, citing allegations tied to past mortgages, has revived concerns over Fed independence and added to investor caution.
The move comes amid broader efforts by the administration to reshape the Fed’s policy stance. If Cook were to step down, the voting balance on the Board could tilt more dovishly. Governors Waller and Bowman have already dissented in favour of rate cuts, and Stephen Miran – recently named as a temporary replacement for Adriana Kugler – is expected to support more aggressive easing if confirmed by September.
The potential exit of Cook would amplify dovish voices within the FOMC and deepen internal divisions, increasing uncertainty around the Fed’s policy path. This dynamic is contributing to a steeper yield curve and could reintroduce downside risks for the dollar, especially if market confidence in the Fed’s independence continues to erode.
The US dollar has staged a modest rebound this week though, recovering slightly against a basket of major peers. However, trading has been relatively subdued due to a lack of fresh economic data – until today. August flash PMIs will offer a timely health check on the US economy, potentially shaping near-term dollar direction.
Meanwhile, investor focus is shifting toward Friday’s Jackson Hole symposium, where Fed Chair Jerome Powell is set to speak. His remarks will be closely scrutinized for clarity on the Fed’s policy stance amid renewed political pressure and internal divisions. With markets already jittery over recent attacks on Fed independence, Powell’s tone could prove pivotal for the dollar’s trajectory heading into September.
Flash PMIs could jolt euro
EUR/USD has been stuck in a tight holding pattern this month, with daily moves rarely exceeding 0.5% in either direction. The pair’s subdued price action reflects a broader lull in FX volatility, as traders await a catalyst to break the deadlock. Despite a strong year-to-date gain of 12%, bullish momentum has clearly faded, with the pair now consolidating around its 21- and 50-day moving averages.
Today’s eurozone flash PMIs could provide that spark. Investors are watching closely for signs that business sentiment is deteriorating in the wake of the new US-EU trade agreement. The warning signs are already flashing: August’s ZEW survey showed a sharp drop in German economic sentiment, with the expectations index plunging 18 points and current conditions falling deeper into negative territory.
With EUR/USD rangebound and volatility low, any downside surprise in the PMIs could tilt sentiment more defensively. That said, the broader FX narrative is beginning to shift back toward growth differentials. The euro’s rally earlier this year was underpinned by narrowing growth gaps between the eurozone and the US. While the euro area economy has shown resilience and could benefit from fiscal support later this year, signs of slowing momentum in the US may revive divergence themes – potentially reigniting euro upside if confirmed by incoming data.
Losing Interest: sterling’s real rate reality
UK real interest rates have declined sharply over the past year, dropping from a peak of 3.3% in September 2024 to just 0.2% today. With CPI inflation running at 3.8% and the Bank of England’s (BoE) policy rate at 4.0%, inflation-adjusted returns have eroded significantly. This deterioration points to a loosening in financial conditions, despite the nominal rate remaining relatively high.
Real rates are a crucial barometer of monetary policy stance. Their decline suggests that current policy settings may no longer be sufficiently restrictive to curb nominal demand growth. Whether inflation can sustainably return to target without tighter conditions is increasingly uncertain, particularly with 12-month inflation expectations still hovering around 4%.
For sterling, the implication could be broadly negative. Lower real yields reduce the relative attractiveness of UK assets, especially when compared to economies like the US, where real rates remain firmly positive. This dynamic risks triggering capital outflows and weighing on GBP, particularly against higher real-yielding peers.
Given the BoE’s own forecast that inflation has yet to peak, the decision to cut rates earlier this month came as a surprise to some. With inflation expected to top out at 4%, another rate cut in November would push the real policy rate into negative territory. However, market pricing suggests growing scepticism around further easing, with the probability of another cut before year-end now below 50%.
Combined with persistent inflation and weak growth prospects, the UK faces rising stagflation risks – a toxic mix that could constrain the BoE’s policy flexibility and deepen the pound’s vulnerability. In this environment, GBP/USD may struggle to sustain rallies, while GBP/EUR could remain range bound.
The FX options market may begin to reflect this shift in sentiment, with risk reversals potentially skewing more negatively for GBP as investors seek protection against further depreciation.
Safe haven FX back in demand
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: August 18-22
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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.
