US data keeps Fed hawks in play

USD: Dollar awaits Warsh for direction

The US data offered enough strength to keep Fed hawks engaged, but not enough to move the dollar. Headline PCE rose 0.2% in July and 3.7% over the year, both slightly above forecasts, while core PCE matched expectations. Services inflation also remained firm. However, income outpaced spending, giving households room to rebuild savings. GDP held at 1.5%, while the durable goods beat relied heavily on transportation and stronger revisions.

The initial rates reaction looks noisy rather than decisive. The two-year yield rose as markets focused on firm inflation, while Treasury buybacks continued to contain the long end. That tension has steepened the curve and weakened the dollar’s usual link with yields. Markets still price a 42% chance of a September hike, but today’s data should not shift that probability far. Payrolls and CPI will carry more weight unless Kevin Warsh provides clear guidance at Jackson Hole.

Geopolitics adds another layer of uncertainty. Talks over a temporary Hormuz shipping corridor have lowered oil prices and reduced some demand for dollar. Yet threats against further Iranian mining activity leave a renewed escalation within reach. Meanwhile, fiscal concerns and unpredictable US policy continue to challenge confidence in American assets. Gold’s 14% monthly surge suggests investors are hedging that credibility risk, not simply preparing for easier Fed policy.

DXY remains trapped near 99.00, with 98.80 marking the immediate floor. A break below that level could expose the May low near 97.96. A hawkish Warsh speech could instead lift the index toward 99.50 to 100.00. The key question is whether Warsh treats recent inflation as temporary disruption or evidence of excess demand. If Warsh stays vague, payrolls and CPI will decide the September debate and the dollar’s next move.

CAD: Holds firm through trade escalation

USD/CAD is trading near 1.3860, despite a sharp escalation in the US-Canada trade dispute. Washington imposed 50% tariffs on about $20 billion of Canadian goods, while Ottawa announced retaliatory duties on C$27.6 billion of US products from September 8. Canada also signalled that further measures remain available. Meanwhile, President Trump has threatened to raise tariffs on Canadian vehicles and parts to 50% from January 2027.

Yet USD/CAD has stayed within a narrow 1.3760 to 1.3900 range. The latest US tariffs cover a limited share of total Canadian exports, which has contained the wider economic impact for now. Softer US data and concerns about US fiscal credibility have also reduced demand for the dollar. As a result, Canadian bonds have rallied without triggering a sustained CAD selloff.

Rates now offer the clearest guide for the next move. The US-Canada two-year yield spread sits near 127 basis points, below its late-July peak but above its post-payrolls low. Today’s US PCE report gave the US dollar a fresh boost as inflation data topped estimates for the month of July, pushing the USD/CAD slightly higher. A credible hawkish message from Kevin Warsh this Friday at Jackson Hole would support the dollar, although that’s still unlikely. A cautious Fed signal could extend CAD’s recovery. At the same time, markets will focus on Canadian Q2 GDP report, which is expected to confirm the economic rebound throughout the spring.

For USD/CAD, 1.3900 remains the key resistance level. A break above it could open the 1.4000 to 1.4100 area as markets price deeper trade damage or the US dollar reasserts its link to higher yields. A move below 1.3760 would shift attention toward the 1.3500 to 1.3700 range. Until either level breaks, trade headlines may drive volatility, but Fed policy and macro data this Friday will decide direction.

EUR: Ifo extends winning streak

Yesterday saw the fourth consecutive monthly increase in Germany’s flagship leading indicator, the ifo index, which rose to 88.8 in August from 86.6 in July. The index now sits at a one-year high, which is encouraging news, especially given lingering geopolitical pressures in the Middle East and tighter fiscal conditions. The more optimistic sentiment has also been consistent with the improvement in hard economic data seen in recent months, strengthening the case for a continued recovery.

For the euro, while there have been few short-term gains, the backdrop remains constructive. Since the conflict in the Middle East erupted, the ECB’s tightening bias has failed to translate into meaningful euro support, as growth concerns linked to higher energy prices have weighed on sentiment. Evidence of a more resilient economy and more contained price pressures would help restore the rates transmission channel, making a hawkish ECB suddenly appear much more credible.

On that note, ECB Executive Board member Isabel Schnabel reiterated yesterday that interest rates may need to rise further, citing upside risks to inflation from the prolonged conflict and the surprisingly strong eurozone’s economy. The euro showed little reaction, likely reflecting both Schnabel’s well-known hawkish stance and expectations that the ECB’s September decision is already leaning in that direction.

In the near term, however, another leg higher in EUR/USD remains largely a USD-driven story. The pair is consolidating in a tight 1.1650-1.17 range, with a break to the upside likely hinging on inputs from Bessent and Warsh.

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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.