Summer markets can often spring sharp market moves, as thin liquidity causes price action to shift for little reason. For example, we haven’t seen anything like last August’s volatility when the carry trade was questioned as Japan was embarking on policy normalisation. Instead this year has seen increasing policy divergence between central banks, highlighted by the recent “hawkish cut” by the Bank of England with no more policy easing seen this year, in contrast to more than three 25bps Fed reductions now priced in by the market for 2025.
Interestingly, these rate cuts are forecast to happen before Fed Chair Powell leaves, not after. The latest US inflation report is due this week and is likely to see core around the 3% mark, while we know the unemployment rate sits in the low 4% area. Do three and half cuts in that environment seem plausible? Every data point is likely to take on bigger significance going forward, with two more CPI reports and another NFP release before that ever-increasingly important September FOMC meeting. Each one will be a proper test of the current dovish market conviction. There could also be a focus on next week’s Fed symposium at Jackson Hole – will policymakers/Powell further disappoint or finally please the POTUS?
US stocks ignored the bearish weekly engulfing candle and rebounded over recent session on their way to yet more probable record highs. The performance of the equal-weight and actual S&P 500 index is diverging further after mostly stellar earnings from the tech titans. The White House’s choice to exempt the largest US firms from tariff pain has also helped. It seems AI capex is now the key underlying driver for the major indices as a whole now – this only matters when it matters.
As for the dollar, we highlighted the ‘death cross’ on the weekly Dollar Index chart. It was the first time the 50-day SMA had crossed below the 200-day SMA since January 2021. The previous two weekly bearish indicators of this type marked the bottom for USD and a rally followed. This time around, the index has found support at the 50-day SMA which has been resistance for most of 2025. President Trump is scheduled to meet Russian president Putin over the coming days to discuss the war in Ukraine, after US special envoy Witkoff visited Moscow last week. Details of the meeting are still unclear, but most remain doubtful that a major breakthrough will be reached. That could impact the Dollar Index if the euro gets sold on any disappointment.