Fed hawkery, macro beats send US Dollar to two-month high
Markets responded firmly to stronger-than-expected U.S. macro data and an unexpectedly hawkish tone from Chair Powell, sending the dollar up 1% on the day and 2.5% over the past five sessions. This marks its strongest five-day performance since September 2022.
Two notable upside surprises contributed to the dollar’s rally:
- Q2 GDP beat: The second-quarter GDP print registered at 3%, significantly above consensus estimates. However, the composition of the report suggests a less robust underlying trend. A sharp contraction in imports led to a substantial positive contribution from net exports, adding roughly five percentage points to the overall growth figure. This dynamic presents a distorted view of real activity, much like the previous quarter’s decline overstated economic softness. In Q1, imports and inventory accumulation surged in anticipation of potential tariffs, while in Q2, both categories reversed. Taking both quarters together, average real GDP growth of 1.25% more accurately reflects the underlying pace, which remains below the Fed’s long-run potential estimates. Removing the volatility from trade and inventory components, real final sales to domestic purchasers, a measure of core demand, rose just 1.3% across the first half of the year, underscoring a more modest expansion.
- ADP surprise: The ADP report showed a considerable upside surprise, with 104K private-sector jobs added, well above expectations. While the ADP release does not have a strong track record of forecasting nonfarm payrolls, the size of the beat was sufficient to influence market sentiment, adding support to the dollar.
- The Fed: The Fed’s press release included the expected dovish signals, notably dissenting votes from Governors Bowman and Waller, whose views are aligned with the administration and may reflect positioning to replace the Fed Chairman next year. Yet Powell’s remarks during the press conference were significantly more hawkish than anticipated. One particular comment, suggesting the Fed might now be looking through tariff-related volatility by refraining from a rate hike, caught markets off guard. The implications were immediate: September rate cut expectations were repriced lower, equity indices declined, and both yields and the dollar moved higher. Powell reiterated the Fed’s data-dependent approach heading into the September 17 meeting, reinforcing its dual mandate and the need to weigh risks to both inflation and economic growth. Commentary from dovish FOMC members, Bessent and President Trump may emerge in the coming days, adding some noise around monetary policy. However, macro will lead the way until September 17.
- Earnings: In addition to macro and monetary policy, corporate earnings could provided further support to risk-on sentiment. Microsoft and Meta delivered results that handily beat consensus, reinforcing the accelerating momentum behind AI, a theme rapidly emerging as a structural growth driver for the U.S. economy. Their strong earnings are poised to extend risk appetite through month-end, particularly across technology names, where investor conviction around long-duration AI narratives continues to deepen. At the close today, Apple and Amazon will end the week for the Mag-7.
Hard data hits harder: euro shrugs off tariff talk
Yesterday’s EUR/USD price action was revealing of how hard U.S. macro data has become the the pair’s most impactful catalyst: stronger-than-expected U.S. GDP figures sent EUR/USD below the 50-day moving average — a technical stronghold for the rally earlier this year. The pair closed below it for the first time since the onset of the euro surge against the dollar, with the downfall gaining further momentum after Powell’s expected hawkish rhetoric, delivered right after holding rates steady for the fifth consecutive meeting.
Meanwhile, the market barely flinched when Trump announced 25% tariffs on India — an announcement that might have rattled the dollar just months ago.
It’s not just noise EUR/USD is shrugging off, however. Even eurozone macro surprises seem to lack the power to move the needle.
In fact, an above-consensus eurozone GDP print of 0.1% (vs flat expectations) failed to fuel euro buying. The picture was mixed: Germany and Italy each contracted by 0.1%, while France and Spain propped up the aggregate figure. Bunds rose on release but pared gains soon after, as the broader growth composition sank in.
Looking ahead, EUR/USD’s short-term trajectory remains bearish. It would take a material U.S. data miss or some draconian tariff implementation — not just threats — as August 1st approaches to recalibrate the balance of risks more in favor of the euro.
Expect the pair to decline further this week, with newly established support at 1.14 vulnerable. Beyond that, there’s little strong support until 1.12.
Mixed moves for sterling
The pound’s strength earlier in 2025 was underpinned by a more supportive UK economic backdrop, improved political stability, favourable yield spreads, and constructive risk sentiment. However, many of these tailwinds have moderated in recent months, and sterling has come under pressure, more recently against the dollar.
In July alone, GBP/USD has dropped over 3%, reaching fresh two-month lows and breaking south of its 100-day moving average support in a sign of deeper declines ahead. This move has mirrored the broader fall in EUR/USD too, as the US dollar has extended its rebound on the back of resilient US growth and elevated Treasury yields. Historically, GBP/USD and EUR/USD have a high correlation, reflecting the deeply intertwined UK-EU economic relationship. As that correlation intensified in recent days, the pound’s moves have become more exaggerated – amplifying the downside versus USD.
Yet while GBP/USD has moved in tandem with EUR/USD, sterling has simultaneously capitalised on euro weakness – rebounding 1.3% this week against the common currency. August may offer a brief reprieve for sterling amid a lull in major domestic catalysts and stabilising global risk sentiment. With much of the recent volatility tied to external drivers – particularly USD strength – this period could see the pound find firmer footing, especially if euro weakness continues to offer relative support.
However, calm may be short-lived. As markets begin to turn their gaze towards the Autumn Budget, political and fiscal uncertainty could reintroduce volatility. Investors will be parsing the government’s plans for spending, taxation, and economic growth – key themes that often influence UK asset pricing. Any signal of policy divergence or increased fiscal strain could reignite concerns around the pound’s trajectory, particularly if compounded by a fragile macro backdrop.
A sea of red
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: July 28 – August 1
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.
