USD fortunes reversed amid strong US data, trade deals and hawkish Fed comms

The fortunes of the dollar have changed dramatically of late amid a combination of solid US data, the signing of trade deals and a hawkish set of communications from the Federal Reserve.

This week’s GDP figures showed that the world’s largest economy rebounded nicely in Q2 (+3% annualised), shaking off the midl first quarter contraction. We’re still not seeing any real signs that American businesses or consumers are fazed by the lingering uncertainty surrounding the tariffs, and fears of a sharp slowdown in the US economy, at least for now, appear to have been overdone. Not only does the data support the narrative that the US economy is almost immune to the tariff disruption, but it will no doubt ease pressure on Powell and co. to lower the fed funds rate.

As expected, there was no change from the FOMC on Wednesday, but the communications were relatively hawkish. There were two rare dissenters in favour of a cut (Waller and Bowman), as we had anticipated. Interestingly, this is the first time since 1993 that two or more governors have gone against the grain in the same FOMC meeting.

US growth was no longer seen as “solid”, but Powell continued to talk up the jobs market and called policy only “modestly” restrictive. A September cut is not entirely off the cards, but if inflation shows evidence of being nudged upwards by the tariffs, then we may have to wait until October or December for further easing.

This should be supportive of the dollar, which we contest still has more room to rally in the near-term.