Caught between geopolitics and Fed signals
Not much came out of the much-awaited meeting between Putin and Trump on Friday. Most notably, no ceasefire was mentioned. President Zelenskiy is scheduled to meet Donald Trump today, as he and European allies push for a trilateral summit with Putin.
What is clear is that Putin’s stance on Ukraine making territorial concessions remains firm. Trump and Putin appear to have reached an “understanding” likely to include such concessions. The absence of a ceasefire is seen as a win for Putin, who can continue making gains on the battlefield while the peace deal involves significant territorial compromises. The consensus is that Trump will pressure Zelenskiy at the summit to cede parts of Ukrainian territory—most likely the much-contested Donbas region in the east.
In a subsequent interview with Fox News’ Sean Hannity, Trump explicitly put the ball in Zelenskiy’s court to “get it done.”
The meeting occurred late in U.S. trading hours, with little reaction in FX markets. While macroeconomic data remains the primary driver of the dollar’s price action, more concrete geopolitical developments this week may exert additional influence. A non-ceasefire scenario is considered the most bullish for the USD, which would strengthen through two key transmission mechanisms: geopolitical risk, which enhances its safe-haven status, and rising oil prices, which increase global demand for dollar-denominated transactions.
On Friday, the dollar fell ~0.3% despite a broad-based rise in U.S. retail sales and upward revisions to the previous month’s figures. The data was likely interpreted cautiously, given a weak labor market and lingering uncertainty. Hopes for a more constructive outcome from the Putin-Trump summit had also weighed on the greenback.
This week, the release of the Fed’s minutes and the Jackson Hole Economic Policy Symposium will be pivotal. It will mark the first time the Fed comments publicly since speculation began about a dovish tilt in response to recent data. If that tilt is confirmed, it will further pressure the dollar.
CAD worst performer year-to-date
The USD/CAD has been remarkably stable month-to-date, holding a tight range between 1.388 and 1.372. This period of relative calm, with the pair trading between its 20-day and 100-day moving averages, is a deceptive indicator of the underlying economic reality in Canada. The primary force preventing the Canadian dollar from weakening further is not its own strength, but rather a broad-based softness in the U.S. dollar, which is masking persistent domestic and external pressures on the Loonie. In fact, the Canadian dollar is the worst-performing G10 currency year to date. While it has gained against the U.S. dollar, outperforming the USD DXY Index by 4%, its decline has been particularly pronounced against other major currencies. Notably, the CAD has hit its lowest level against the Euro since 2009. Among other G10 currencies, the Canadian dollar’s performance also trails behind the Australian and New Zealand dollars, which are up 5.16% and 5.86% respectively against the U.S. dollar.
Although net short positioning against the Canadian dollar has eased from its historical highs, it has persisted for two years, the longest streak on record. The Canadian dollar’s prospects hinge on two key factors: the Federal Reserve delivering on interest rate cuts and the Bank of Canada holding its rate steady until the end of the year. However, deeply entrenched inflation in both the U.S. and Canada, coupled with a hawkish stance from Fed Chair Jerome Powell, could keep the yield differential at historically elevated levels. The spread between short-term U.S. and Canadian government yields, which reached a year to date high of 163 basis points this past February, has stayed above 100 basis points for nine months.
The last time this yield spread remained above 100 basis points for a sustained period was in 1996–1997, following the “Tequila Crisis” in Mexico. At that time, it took 15 months for the spread to fall below 100 basis points and another year to reach zero. This persistent differential, which has not fallen below its 40-basis-point negative mean since 2015, points to a decade divergence in economic growth between the neighboring countries.
This week, markets will focus on Canadian CPI data, with the monthly reading projected to rise by 0.3% and the annual rate expected to decline slightly to 1.8%. This is one of two inflation reports scheduled before the Bank of Canada’s September monetary policy meeting. Of equal importance will be Federal Reserve Chairman Jerome Powell’s annual address at Jackson Hole, particularly given the market’s high expectation for another Fed rate cut in September.
Euro eyes peace dividend
The euro continues to flirt with the $1.17 level against the US dollar at the start of the week, despite no tangible progress emerging from the US-Russia meeting. Broader financial markets remain stable, supported by a lingering sense of underlying optimism. European equity futures are modestly firmer, while oil prices remain subdued, reflecting a cautious but constructive tone across risk assets.
A peace deal in Ukraine would likely support the euro by reducing geopolitical risk, stabilizing energy markets, and improving the Euro Area’s growth outlook. Lower inflation volatility and stronger sentiment could also reinforce expectations for a prolonged ECB pause, making euro assets more attractive.
Important data releases next week include the final print of Eurozone July inflation, which will confirm whether disinflationary trends are continuing amid still-elevated services price pressures. We get the preliminary August PMIs and consumer confidence, both of which will offer timely insights into growth momentum and sentiment heading into Q3. The final print of German Q2 GDP, including the expenditure breakdown, will help clarify the drivers behind Germany’s stagnation, and Eurozone Q2 negotiated wage data will be released – closely watched by the ECB as a key input into its inflation outlook.
ECB President Christine Lagarde will speak at the International Business Council of the World Economic Forum in Geneva on August 20 and again at the Jackson Hole Economic Symposium on August 23. While these are high-profile events, we do not expect Lagarde to offer any direct guidance on the September 11 policy decision.
UK inflation in focus
Sterling ended last week nearly 1% higher, driven by a hawkish repricing from the Bank of England (BoE) following stronger-than-expected GDP and labour market data.
This week, GBP/USD could test and potentially break above resistance at $1.36 – a level that was tested last week but ultimately held. Wednesday’s inflation report will be pivotal. The BoE’s primary concern remains sticky price pressures. With private wage growth hovering around 5%, service-sector inflation is expected to remain elevated. Should inflation surprise to the upside, a breach of $1.36 becomes likely, as expectations for further rate cuts are scaled back. Markets currently price in just under a 60% chance of one additional cut by year-end.
Meanwhile, GBP/EUR could settle into the €1.16 zone this week. Unless inflation surprises to the downside, the pair is likely to climb further, supported by limited progress on the Ukraine–Russia front. This geopolitical stagnation is expected to weigh on the euro, as elevated oil prices – on which the eurozone heavily depends – add bearish pressure.
Loonie versus Pound, Euro and Yen making new 2025 lows
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: August 18-22
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.ve 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.
