The threat to the Fed’s independence isn’t moving the needle in markets, as they’re showing high tolerance for this level of discomfort. This week, the focus will shift to macro data, starting with Thursday’s GDP revisions and Friday’s July core PCE data. The PCE, which is the Fed’s preferred measure of inflation, is expected to show a yearly increase. Even a hotter-than-expected reading is unlikely to affect expectations for a September rate cut. At this point, it would be very difficult for Chair Powell to backtrack on his remarks from the Jackson Hole Economic Symposium. Any surprises, however, could spark significant volatility, particularly for the dollar, even though the recent wave of selling has begun to wane.
Tariff rollback eases pressure on Bank of Canada
Governor Macklem’s remarks in Mexico City, delivered yesterday, offer a revealing look into the Bank of Canada’s current thinking, particularly against the backdrop of Canada’s recent decision to scrap most retaliatory tariffs on US imports. The speech’s central theme, that the world is more “shock-prone” and uncertain, is a direct reflection of the volatile trade environment that has defined much of the year. Macklem’s repeated emphasis on adapting the monetary policy framework, improving models to capture sectoral disruptions, and using scenarios to navigate trade policy uncertainty underscores the Bank’s profound concern over the economic fallout from the tariffs. The recent tariff rollback by the Canadian government, therefore, provides a significant shift in the Bank’s base-case projection for the economy.
The Bank’s past reliance on scenarios for its interest rate decisions, as mentioned in the speech, was a direct response to the unpredictability of US trade policy. The now-lifted retaliatory tariffs were a key variable in these scenarios, creating both upward pressure on inflation (from more expensive imports) and downward pressure (from a potential economic slowdown). With the majority of these tariffs now removed, one major source of economic uncertainty has been reduced. This does not eliminate all trade risks, as Macklem notes that tariffs on steel, aluminum, and autos remain, but it significantly simplifies the Bank’s forecasting.
The decision to scrap the tariffs provides a clearer path for the Bank of Canada. The removal of these trade barriers on a wide range of goods will likely ease cost pressures on Canadian consumers and businesses, providing some relief from the inflationary forces of the past year. This could be a significant factor in the Bank’s September decision. With a major headwind removed and a renewed emphasis on data-dependency, the Bank may be more inclined to keep interest rates stable, or even consider a cut if the economic data confirms that the economy is weakening and the risks of sustained inflation from trade have diminished.
The new tariff is political interference
August saw the Dollar Index (DXY) drop just over 1.5%, with 97.600 acting as a key support level. Two major bearish events contributed to the steepest sell-offs: first, on August 1st, a disappointing Non-Farm Payroll (NFP) report was followed by the dismissal of the head of the Bureau of Labor Statistics (BLS). Then, on August 22nd, building on the earlier developments, Fed Chair Jerome Powell emphasized that a weakening labor market could open the door to a rate cut in September. Outside of these events, the DXY remained range-bound between 97.600 and 98.500.
The Fed’s policy rate trajectory – alongside the evolving narrative around central bank independence – continues to be the dollar’s most influential driver, alongside broader U.S. macroeconomic data. This week, those forces played out over a compressed time frame, causing the dollar to whipsaw. On Monday, markets digested the Jackson Hole symposium and Powell’s remarks about a higher post-GFC neutral rate, which implies elevated rates today despite entering a potential cutting cycle. The dollar rose by approximately 0.7%, but gave back about half of those gains yesterday following threats by former President Trump to dismiss Fed Governor Lisa Cook.
Based on August’s performance, therefore, the sentiment-driven narrative has shifted from tariff-related noise to concerns over Fed independence. The former has evolved into concerns that tariffs may adversely affect the U.S. economy, with some data evidence suggesting that tariffs, and the uncertainty around them, has dampened economic activity and weakened the labor market – this month’s NFP report being the clearest indication. The latter stands today as the dominant, despite weaker, force in dollar movements. It will be interesting to see whether, in the longer run, the Fed independence narrative, unlike the tariff story (which primarily led to dollar weakness via the hedging channel), can trigger outright selling of U.S.- denominated assets – particularly at the long end of the Treasury curve.
Banxico poised for rate cut as Peso looks to Fed’s next move
The latest bi-weekly Mexican CPI report provides Banxico with a clear signal to continue its monetary easing cycle. Both headline and core inflation came in below market expectations, with a significant drop in non-core agricultural product prices driving the disinflationary trend. This favorable data, which has kept annual headline and core inflation stable, offers Banxico the justification needed to proceed with its strategy of gradual rate cuts, providing a cushion against potential economic headwinds.
This positive inflation data has paved the way for a highly anticipated 25 basis point rate cut at Banxico’s September 25 meeting. Looking beyond this move, the central bank’s policy path is expected to become increasingly synchronized with that of the U.S. Federal Reserve. The data suggests Banxico will likely match any future Fed rate cuts to maintain its monetary stance and support the peso against external pressures, a strategy that underscores the heightened sensitivity of local policy to global monetary trends.
Despite the positive domestic inflation news and a clear path for Banxico to continue easing, the Mexican peso’s recent muted performance reflects a market more focused on external, geopolitical factors. The currency’s price action is currently being dictated by the US Dollar, the political noise in the U.S., and the uncertainty surrounding the Federal Reserve. During most of 2025, while Banxico’s policy is guided by domestic fundamentals, the peso’s year-to-date performance has been significantly more influenced by global monetary policy expectations, high-yield carry and market sentiment around emerging markets. The currency’s near-term trajectory will thus remain tethered to the evolving narrative in Washington, overshadowing domestic data.
Fragmentation risk returns
While yesterday’s Fed saga developments ultimately dominated headlines and overshadowed the French debacle, with EUR/USD closing 0.33% higher, the pair oscillated during the day between 1.1600 and 1.1650 amid these contrasting forces. The market-moving power of the former has been clearly demonstrated, yet it remains uncertain to what extent the likely collapse of the French government will exert downward pressure on the euro.
At a time when the unity of the European Union has already been challenged – most recently by a poorly negotiated trade deal – we believe the euro is more vulnerable than usual. Fragmentation within the bloc becomes a more significant weakness precisely when cohesion is most needed.
In response, we observe one-month EUR/USD volatility trading higher relative to other maturities, as September shapes up to be a pivotal month for France. The confidence vote on September 8, 2025, will determine whether Prime Minister François Bayrou’s government survives.
USD bid ahead of GDP, PCE
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: 25 – 31 August
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.
