Familiar headwinds on summer’s closure
Investors returning from summer break will find the market picture remains largely unchanged, with a familiar mix of tensions continuing to shape the landscape. The dollar remains under downward pressure, a trend fueled by a steepening U.S. yield curve and growing expectations of Federal Reserve easing. President Trump’s ongoing criticism of the Fed and concerns about the central bank’s independence have not only stayed but intensified. Meanwhile, legal challenges to the administration’s tariffs have resurfaced. Against this backdrop of political and economic friction, U.S. equity markets have continued their remarkable ascent, with the S&P 500 hovering near historic highs. This week, these three key themes will influence market dynamics, but none will loom larger than Friday’s non-farm payrolls report.
- The tariff legal battle
A significant legal challenge to the Trump administration’s trade policy has advanced. A recent ruling by the Court of Appeals for the Federal Circuit dealt a blow to the use of tariffs under the International Emergency Economic Powers Act (IEEPA). In a 7-4 decision, the court determined that the statute does not grant the President the authority to impose the reciprocal or “fentanyl trafficking” tariffs he had implemented. The judges noted that the law lacks specific language for tariff authority and procedural safeguards.
The ruling has been stayed until October 14 to allow for an appeal to the Supreme Court, a move widely anticipated by both the administration and legal observers. This sets the stage for a high-stakes legal confrontation over the separation of powers and the extent of the President’s authority versus that of Congress. While lower courts have consistently ruled against the President’s actions, the Supreme Court’s conservative majority could potentially influence the outcome.
- The payroll puzzle
At the Jackson Hole meeting, Federal Reserve Chair Jerome Powell signaled a potential shift in monetary policy, opening the door for a September rate cut. His speech adopted a more dovish tone, focusing on the full employment aspect of the Fed’s mandate and downplaying price stability concerns. However, this stance may be premature, as recent data has shown two consecutive months of elevated core inflation, driven by persistently high service sector prices, not tariffs.
However, a September rate cut is not a foregone conclusion. Upcoming data releases, including the next employment report, will provide further clarity. As focus shifts to the job market, will this Friday report validate Powell’s change of tone? A weak jobs report could put downward pressure on the dollar, as it would highlight a policy divergence with other central banks, particularly with the Bank of Japan. It’s likely that the BoJ will hike rates in October, and with the Fed potentially in easing mode, could put more pressure on the Dollar.
- Market disconnect
A sense of disconnect prevails in the markets, or, depending on your perspective, a blend of complacency, underlying strength, or simply fatigue with the ongoing political theatrics. It’s a striking chasm between current macro risks and the unwavering resilience of financial markets.
Despite the persistent threats to the Fed’s independence from the administration, the full ramifications of which the market appears not to fully comprehend, and the economic fallout from tariffs, which thus far have been more sectoral, the market has demonstrated a remarkable tolerance for this political and economic friction.
For the time being, markets seem to be largely shrugging off these risks. Investors are positioning themselves with a short dollar bias, anticipating a weak August jobs report. This sentiment could keep things relatively unchanged in the markets, with the current trend potentially extending beyond mid-September. The S&P 500 is near historic highs, the fear index, the VIX, has dropped below 15, rates volatility is at its lowest level since early 2022, and credit spreads are extremely tight. This calm in the face of macro uncertainty suggests that the only thing that could derail current sentiment is a significant miss in the August report, accompanied by a strong downward revision to previous months.
EUR/USD breaks north of 1.17 – but can it hold?
EUR/USD kicked off the week on a strong note, with the euro gaining approximately 0.4% against the dollar during Asia trading hours before paring back some of those gains later on. The move was largely dollar-negative, as the greenback was weighed down by a federal appeals court ruling over the weekend that deemed President Trump’s universal tariffs illegal.
However, the court also ruled that the tariffs can remain in place for now, which helped soothe market nerves. As a result, this development is unlikely to trigger a major market reaction. Instead, attention remains firmly on US macro data, particularly Friday’s Non-Farm Payrolls (NFP) report. While the labour market is expected to show slight improvement, the broader picture remains gloomy – with August likely to mark the fourth consecutive month in which the US adds less than 100,000 jobs – offering support to the euro.
Domestically, eurozone unemployment ticked down to 6.2%, reinforcing the view that the region’s economy remains resilient amid global uncertainty. A robust labour market is aiding a modest domestic recovery and may deter further ECB easing this year. In fact, trade negotiations now appear to be the sole factor that could justify an “emergency cut,” should talks escalate without a clear deal in place.
Among ECB officials speaking yesterday, Isabel Schnabel’s remarks stood out, echoing themes from Powell’s Jackson Hole address. She warned that structural forces – such as labour scarcity, climate change, and geopolitical fragmentation – have permanently elevated inflation risks. Schnabel implied that monetary policy may need to remain tighter for longer, as the neutral rate is no longer as low as it was in the 2010s.
EUR/USD broke above August’s broad range of 1.16–1.17, but quickly re-approached resistance. A more substantial catalyst is needed to sustain the breakout, and this week’s US labour data – starting with Wednesday’s JOLTS report – could provide just that.
Sterling’s slow grind
Sterling edged to a 1-week high against the U.S. dollar on Monday, extending its recovery above key long-term daily moving averages—all of which are starting to slope upward, reinforcing a bullish bias. Momentum indicators are also firming: the 14-day RSI is trending higher, though still in neutral territory, suggesting room for further upside without being overbought.
Price action remains constructive, but a decisive break above $1.36 is needed to unlock a retest of the 2025 high near $1.38. With the U.S. nonfarm payrolls report due Friday, volatility could spike – making this a key catalyst for directional breakout potential. Near-term support sits at $1.3480, with resistance layered at $1.3600 and $1.3685.
Sterling’s technical setup against the euro remains subdued, with no new weekly highs in three weeks and daily highs capped for four straight sessions. The €1.16 level continues to act as firm resistance, stalling upward momentum.
Still, there are early signs of potential support building: the 21-day moving average is tilting higher, and a crossover above the 50-day moving average could signal a shift toward bullish momentum. That said, a cluster of overhead resistance from longer-term moving averages suggests any move toward €1.18 will face significant headwinds.
For now, price action remains range-bound, with near-term support at €1.1520 and resistance at €1.16. A break above €1.1625 would be the first technical step toward a more constructive outlook.
In both cases – sterling’s path against the dollar and euro – relative rate differentials continue to favor sterling, with the Bank of England maintaining a more hawkish stance than its peers. This should, in theory, support GBP via the yield channel. However, market conviction remains tepid, as the underlying narrative hinges on sluggish growth and persistent inflation pressures – a fragile foundation for sustained bullish momentum.
Dollar remains about 10% lower YTD
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: August 25-29
All times are in BST
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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.
