The Dollar’s not done dancing yet

Powell didn’t just hold the line—he drew it in thick ink. Two dissenters may have broken ranks, but the Fed chair stood firm, brushing off White House pressure like lint on a lapel. With the FOMC keeping rates steady and Powell reaffirming his inflation vigilance, the message was unmistakable: don’t mistake patience for weakness.

FX markets heard him loud and clear. September rate cut bets were trimmed, front-end Treasuries got clipped, and the dollar flexed higher—like a sprinter who stumbled out of the blocks but found perfect form by the halfway mark, accelerating into clean air while the competition struggled in the slipstream.

And this dollar rally may still have legs. If today’s core PCE print tips above consensus—as implied by yesterday’s GDP deflator math—then the inflation picture gets a fresh coat of stickiness. Assume 0.14% MoM in April and 0.18% in May, and you land near 0.46% for June—well north of the 0.3% forecast. Even if revisions tamp it down, the risk bias is clear: inflation is not fading quietly.

Add to that the recent six-week decline in jobless claims—the longest such run since Q3 2022—and Powell’s emphasis on the unemployment rate starts to ring a little louder. If Friday’s payrolls don’t wobble, the Fed’s pause looks even more protracted. In that case, USD upside is still on the menu.

The dollar’s move higher tracks not just the data but the narrative. A hawkish Fed tone and the market's reluctant realignment with Powell’s messaging have created a cocktail few can fade just yet. That 16bp of September easing probability has already slipped to 11bp, and another firm inflation print or solid labour report could push it closer to zero. We’re not calling the top on this dollar move—there’s still fuel in the tank.

Meanwhile, the euro remains in a defensive crouch. Second-quarter eurozone GDP might have beat the whisper number at 0.1% QoQ, but it barely moved the needle. The EUR/USD slide from the post-tariff-deal highs has been a one-two punch: first on eurozone growth gloom, then on Fed-driven USD strength.

Flash inflation data out this morning from France, Germany, and Italy may offer some momentary noise, but barring a shocker, the market will likely keep leaning dovish on the ECB. With only 15bp of cuts priced by year-end, there’s room to backtrack if the data underwhelms. And with ECB officials largely silent in August, the euro could drift without a rudder.

Technically and fundamentally, EUR/USD looks vulnerable. A retest of 1.1200 is within reach if U.S. data continues to shine on the hawks. But I still think a bounce back toward 1.1600 is possible into the fall as tariff inflation finishes passing through and the Fed's hand may finally be forced—but until then, we’re bracing for more downside probes.

The Bank of Japan made waves by standing pat on rates but upgrading its FY2025 inflation forecast from 2.2% to 2.7%—a notable shift for a central bank not known for forward inflation confidence. It’s a nod to sticky food price inflation, but also a sign that the BoJ is edging closer to its first real tightening cycle in decades. Still, they’re threading the needle, acknowledging downside risks to growth and signalling that any normalization will be glacial and heavily data-driven.

For now, the yen remains caught in the slipstream of U.S. yield differentials, but markets are sniffing the early signs of a pivot. It’s not imminent—but it’s no longer unthinkable.

The dollar’s story remains one of strength rooted in divergence. With Powell unwilling to blink and the data refusing to crack, the path of least resistance still points higher. But we’re watching every data print now with surgical focus—because when this run stalls, it won’t be a drift lower. It’ll be a swift about-face. Until then, the bid stays firm, the divergence stays real, and Powell stays king of the Eccles Building.

Waiting for the mirage to either materialize or vanish

Jerome Powell stands in the eye of a storm he can’t yet see. Not because it's not coming—but because it might already be here, hidden in the strange stillness that often precedes the break. The economy is humming just enough to obscure its own fault lines, and Powell, ever the cautious navigator, has chosen patience as his compass, hoping the next two months will strip away illusion and reveal the true lay of the land.

He isn’t steering anymore; he’s drifting by design, waiting for the currents beneath the surface to declare their direction. The rate decision was less a move and more a meditation—Powell keeping his hands off the wheel not from confidence, but from the recognition that the instruments may be giving false readings. He knows the terrain might be splitting beneath the wheels, even as the vehicle glides on a freshly paved road. Strong GDP, robust household wealth, and an AI-fueled glow mask the quiet erosion beneath—the soft decay of hiring momentum, consumer fatigue, and the tightening grip of real-world costs.

This is a tale of two economies running parallel like competing market narratives—one written in glowing tech margins and surging portfolios, the other scrawled in overdraft fees, shrinking tips, and rent increases. Powell is gambling that time, and time alone, will show which story is real and which is just tape noise. But time is a double-edged trade. Delay too long and the market unravels beneath you. Jump too early, and the credibility trade evaporates in an instant.

He’s been here before. The pandemic’s aftermath, the overshoot on stimulus, the painful catch-up of 2022—each chapter marked by misreads, by ghosts disguised as data. Now, tariffs snake across the landscape like hidden tripwires—laid not by the Fed, but by the very administration demanding rate cuts. And Powell, ever watchful, knows that pulling the trigger too soon, in the face of politically-induced price pressures, would be to hand the gun to the wrong side of the aisle.

So he waits. Not passively, but with the wariness of a man who’s seen what happens when you trust the weather report in a market this cross-winded. He’s watching for signs—not in the S&P or the jobless rate—but in the hollowing-out of job breadth, the slipping spine of the labor market, and the faint but growing hesitation in discretionary spend. Not collapse, but a cooling. Not panic, but the slow exhale of overstretched households finally blinking in the glare of accumulated costs.

And yet, just a few pages over, another narrative insists on its truth. The U.S. has defied every dire forecast in recent years, punching through rate hikes, banking stress, and now tariff disruptions with the swagger of a market high on its own resilience. A booming AI supercycle and the wealth effect from four years of asset appreciation continue to lift the top end of consumption. To many, this is no illusion—it’s a new baseline. Recession? Not even close. In this version of reality, the Fed’s next move should be no move at all.

So the board is set. The dice have been rolled, but they’re still in the air. Powell's dilemma isn't about knowing where they’ll land—it’s about having to place a bet before they do. And that’s the heart of this gamble: the tradeoff between reacting late and acting wrong. A timing mismatch that, in this cycle, could cost more than a few basis points—it could reshape the market’s faith in the Fed’s compass altogether.

For now, Powell walks the monetary high wire, arms outstretched, with inflation on one side, unemployment risk on the other, and political artillery firing from the ground below. This isn’t strategy—it’s survival. And in that fragile balance, every data point becomes a gust of wind. Every earnings report, CPI print, or labor release could shift the wire just enough to force a step, one way or the other. The question is whether Powell will still be the one walking it—or whether the wind decides for him.