Fed autonomy still in question
The US dollar surged on Monday, posting its strongest daily gain of the month with a near 1% rise against a basket of major currencies. This sharp rebound reversed losses triggered by Fed Chair Powell’s dovish tone at Jackson Hole, suggesting markets may be reassessing the deeper implications of his remarks. Notably, Powell’s acknowledgment of a higher neutral rate hints at a structural shift away from the post-GFC era of persistently low interest rates. While initial reactions focused on dovish cues, the broader takeaway is that the “low for long” paradigm may be fading.
Adding to the dollar’s momentum is the growing likelihood of Governor Christopher Waller becoming the next Fed Chair. Waller’s pragmatic approach and strong credibility have reassured markets, especially amid rising concerns over Fed independence. Backed by President Trump’s team and favoured by betting markets, Waller is viewed as a stabilizing figure who could enhance the effectiveness of future rate cuts in supporting the labour market.
However, tensions between the Fed and the White House remain rife. Trump’s push to remove Fed Governor Lisa Cook has reignited concerns over political interference in monetary policy, raising the risk of renewed volatility and dampening risk appetite. From a rates perspective, downward pressure on shorter-dated yields persists amid signs of labour market strain. Yet, political friction may slow this move. Meanwhile, curve steepening is expected to accelerate, with long-end yields facing upward pressure – a dynamic that could weigh on the dollar over time.
On the macro front, today’s Conference Board’s consumer confidence data takes centre stage ahead of US PCE inflation later this week. We caution, too, that with month-end approaching on Friday and the US observing Labor Day on Monday, market volatility is likely to pick up. August’s seasonal liquidity constraints further amplify the potential for outsized moves.
Sentiment takes a hit: The euro’s triple threat
Prime Minister François Bayrou has called a confidence vote for September 8 over his controversial €44 billion austerity plan. His minority government faces the risk of collapse, with major opposition parties pledging to vote against him. This political uncertainty has rattled markets: French bond yields have surged to their highest levels since March, and the spread between French and German 10-year bonds has widened sharply. Meanwhile, EUR/USD has dropped 0.7% so far this week.
This adds pressure to the common currency, which – on the sentiment front – was only just recovering from trade-related debacles, despite recent efforts to finalize something more tangible and, more importantly, eurozone-friendly. And finally, fading optimism over a potential ceasefire or peace deal in Ukraine: a trifecta that ultimately undermines sentiment toward the euro.
Yet dollar sentiment isn’t in great shape either. While tariffs developments have taken a back seat, investors are increasingly focused on the macroeconomic fallout from Trump’s trade agenda and growing threats to the Federal Reserve. Powell’s more dovish-than-expected tone at Jackson Hole last week may have appeased Trump and temporarily contained his persistent criticisms. However, fresh threats to fire Fed Governor Lisa Cook – “effective immediately” – on grounds of allegedly false statements regarding mortgage agreements has left investors wondering what remains of the Fed’s institutional integrity. This marks the second dismissal in less than a month.
EUR/USD may continue to see modest upside from the repricing of Fed rate expectations. Markets are currently pricing in roughly 21 basis points for September, with limited deviation from a full rate cut. That bullish force, however, remains constrained. What could support the euro further is a market interpretation of the Fed’s dovish tilt as a sign of weakened independence under Trump’s influence. Still, a deteriorating job market undermines that narrative, making the dovish stance appear more justified than politically driven. Instead, attacks on the Fed’s renovation site and the dismissal of Fed staff – especially those tied to data releases – remain central to the Fed independence story. This theme could continue to lend support to the euro.
The eurozone data calendar is relatively quiet this week, with the main highlight being the U.S. PCE report due Friday. If the data edges lower as expected, it could encourage EUR/USD to test the 1.17 level. However, a decisive break higher remains constrained by weak euro sentiment, stemming, predominantly, from the French government’s near collapse.
Sterling faces structural strains
Amid broad-based dollar strength on Monday, GBP/USD dipped back below $1.35, remaining confined within a sideways range between its 21-day and 50-day moving averages. GBP/EUR fell to a fresh two-week low of €1.1523, though a rebound may be on the cards if political uncertainty in France begins to exert greater pressure on the euro.
On the domestic front, UK real interest rates have collapsed over the past year – from a peak of 3.3% in September 2024 to just 0.2% today – driven by a surprise uptick in inflation and successive cuts to the Bank of England’s (BoE) policy rate. This erosion in real yields undermines the relative appeal of UK assets, like the pound, especially against economies like the US, where inflation-adjusted returns remain firmly positive. We see this as a long-term headwind capping sterling gains.
BoE Governor Andrew Bailey, speaking at the Jackson Hole Symposium, highlighted the “acute challenges” facing the UK economy. He cited weak underlying growth and a shrinking labour force – pressures exacerbated by post-pandemic participation declines and long-term demographic trends.
The FX options market is already starting to price these risks in as traders keep adding to their bearish expectations on the British currency for eight days in a row, despite an almost 2% advance in GBP/USD so far in August.
It’s a quiet week on the UK data docket, but month-end flows could trigger erratic price action – especially in August, when liquidity tends to be thinner. Hence, investors will remain alert to outsized moves driven more by positioning than fundamentals.
Pound under pressure
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Calendar: August 25-29
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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.
