Daily Analysis 2025/10/23

23. 10. 2025 - Josef Brynda

Latest news

USD

• Friday’s release of the September Consumer Price Index (CPI) is viewed as the most important event of the week for markets.
• The data release will depend on the continuation of the U.S. government shutdown.
• The U.S. economy appears to be entering a period of persistently higher inflation compared to the pre-pandemic era and the Federal Reserve’s traditional 2% inflation target may no longer hold the same weight.
• Headline inflation in the U.S. is expected to exceed 3% annually, marking the fifth consecutive month of increases while core inflation (excluding food and energy) also remains well above the Fed’s 2% goal.
• Inflation expectations both in surveys and market indicators are now around 2.4–3.0%, notably higher than in the pre-pandemic years.
• The Federal Reserve is expected to cut the key interest rate by 0.25% to the 3.75%–4.00% range at its meeting on October 28–29.
• U.S. President Donald Trump said Wednesday he expects to reach several agreements with Chinese President Xi Jinping when they meet in South Korea next week, ranging from resumed soybean purchases to possible limits on nuclear weapons. Trump added he would also discuss China’s purchases of Russian oil and ways to help end Russia’s war in Ukraine.
• EUR/USD trades near 1.1625, with yen weakness providing some support for the USD.
• Despite overall softness, the USD gains ground as investors seek safe-haven assets amid market uncertainty.
• Gold prices tumbled by 8.6%, indicating a shift of capital back into USD-denominated assets.
• The yield on the 10-year U.S. Treasury note fell back to around 3.97% on October 22, signaling weaker economic momentum.

CAD

• Bank of America says the risk-reward setup now favors CAD appreciation, with the possibility of delayed rate cuts by the Bank of Canada (BoC).
• The BoC is expected to keep its policy rate unchanged at 2.50% on October 29, though there is a risk of a 25bp cut. Rate hold could support CAD, as markets may have overpriced future easing
• July GDP rose 0.2% m/m, driven by mining and oil output.
• Manufacturing increased 0.7%.
• September employment rose by +60,400 jobs, mainly in the private sector and goods-producing industries.
• Still the price of Oil remains at its low level, but Oil started to increasing after the U.S. imposed new sanctions on Russian oil giants Rosneft and Lukoil, which could disrupt global oil supply.
• BofA expects two rate cuts one in December and one in January 2026 which would bring the policy rate down to 2.00%.
• Although the latest labor market data came in stronger than expected, previous readings were weak. The same applies to inflation in the preceding months, it hovered around or below the 2% target, but September showed an uptick to 2.4%.
• At the beginning of November, the Canadian government is expected to unveil an economic support package aimed at boosting investment.
• Today, retail sales data from Canada will be released, with forecasts pointing to growth above 1% month-on-month. However, this does not align with the trend observed in previous readings. If the data undershoot expectations, it could further weaken the Canadian dollar.

EUR

• Market positioning remains heavily long on the euro, meaning investors are still holding many bullish EUR positions. Rabobank warns that if data or price action turn against the euro, it could trigger a rapid sell-off, amplifying the downside.
• Tomorrow, PMI data from the eurozone, Germany, and France will be released. Manufacturing is expected to contract across all mentioned economies, while the services sector is projected to show slight expansion. Any deterioration in these figures could raise concerns about the sustainability of Europe’s economic recovery and deepen expectations of further ECB rate cuts.
• Markets have likely over-priced monetary easing expectations in both the U.S. and the eurozone. Since a large amount of easing is already “in the price,” the euro has limited upside and any stronger-than-expected U.S. data could further strengthen the dollar.
• Rabobank highlights the U.S.’s structural advantages over Europe, such as deeper capital markets, stronger economic fundamentals, and geopolitical “hard power.” These factors continue to support the USD’s dominance as the world’s primary reserve and transaction currency, limiting the euro’s global reach.
• Markets price less than a 10% chance of an ECB rate cut at the October meeting, suggesting the easing cycle may be ending.
• European markets open cautiously amid fresh reports of trade sanctions and rising oil prices – risk-off sentiment supports USD over EUR.
• Eurozone construction output increased 0.1% year-on-year in August 2025, easing from a 0.7% rise in July. Output eased for civil engineering (2.6% vs 3.6% in July) and specialised construction activities (2% vs 2.5%).
• Among the bloc’s largest economies, construction fell in Germany, (-1.1% vs -1.4%), France (-1.3% vs -1.7%), and Spain (-1.4% vs -3.8%), but rose in Italy (4% vs 5.4%).
• France is facing a downward trend in its credit rating the S&P Global Ratings agency has recently downgraded the country from 'AA-' to 'A+'.

GBP

• The pound recovered against the euro (GBP/EUR) after the previous decline, climbing back above the 1.15 level.
• Falling UK government bond yields are easing pressure on the country’s fiscal outlook.
• UK inflation for September came in at 3.8%, below expectations of 4.0%, which markets interpret as a potentially positive sign for an economy prone to stagnation.
• Markets now price in more than a 50% chance that the Bank of England will cut interest rates by the end of the year. While lower rates could weaken the pound in the short term, they also reduce bond yields and fiscal pressures, which is seen as a long-term positive factor.

AUD

• Half of Australian industrial businesses report damage from the US tariffs, as employers warn of the ‘greatest disruption to global trade in a century’.
• The AUD strengthened slightly, hovering around the 0.6500 USD level, supported by improving global risk sentiment.
• Positive developments in U.S.–China trade relations boosted investor confidence and lifted risk-sensitive currencies like the Australian dollar.
• Markets are awaiting Australia’s preliminary October PMI data (due Thursday), which will show trends in manufacturing and services activity.
• Stronger than expected PMI figures could indicate solid economic momentum in Q4 and influence expectations for the Reserve Bank of Australia’s (RBA) policy outlook.
• The RBA continues to monitor inflation and labor market trends, which will shape its future interest rate decisions.
• AUD/USD remains range-bound, as investors take a wait-and-see approach ahead of key data releases.
• Technical indicators point to a bearish bias the RSI has dropped below 50, and the MACD has crossed below its signal line.

NZD

• NZD retreats from a two-week high against the USD the NZD/USD pair held above 0.5755 USD, but the previous rally lost momentum.
• Support for the NZD came from easing tensions between the U.S. and China, which improved overall market sentiment regarding trade relations.
• The NZD benefited from USD weakness, as markets priced in the possibility of more than one interest rate cut by the Federal Reserve.
• Technical support around the 0.5700 USD level helped stabilize NZD gains.
• Investors will now focus on further developments in U.S.–China relations and upcoming U.S. data releases, which could influence future Fed policy.
• Domestic New Zealand market remains calm: 2-year government bond yields rose 2 bps to 2.53%, while 10-year yields were unchanged at 3.96%. Additional issuance is planned for the May 2054 bond.
• No significant domestic or regional data releases for New Zealand today global events are limited in importance and are not seen as strong market drivers.

News summary

EURUSD

• The EUR/USD pair is likely set to continue its downward trend. Clear data from the U.S. are currently lacking due to the ongoing government shutdown, however, according to available economic models, inflationary pressures are expected to rise, which could keep the Federal Reserve (FED) in a hawkish stance. This would provide additional support for the U.S. dollar across major currencies. Some models even suggest that jobless claims may have declined during the shutdown, indicating resilience in the U.S. labor market.

  The pair could gain new momentum following tomorrow’s data releases from Europe, particularly PMI indices, as well as a potential CPI release from the U.S., which is forecast to reach around 3%, significantly above the FED’s inflation target. Several analysts warn that U.S. inflation may remain elevated for longer and could continue to rise, which would limit the FED’s flexibility to cut interest rates. Under such conditions, further strengthening of the dollar could be expected through the end of the year and potentially into 2026.

  From the euro’s perspective, there is a risk of a short squeeze, as a large portion of traders still hold long positions on the euro. Any deterioration in the euro area’s economic outlook could trigger position unwinding, adding further momentum to the euro’s decline. Another important factor will be the economic situation in France, where S&P recently downgraded the country’s credit rating. This move could weaken the French bond market and, as a result, increase downward pressure on the euro.

USDCAD

• The USD/CAD pair experienced a slight decline over the past week, as the Canadian dollar strengthened mainly on the back of rising oil prices. The rally in crude was driven by fears of new U.S. sanctions on Russia, which could disrupt global supply, as well as by stronger-than-expected Canadian labor market data and higher inflation readings. Despite this short-term support, the Canadian dollar remains relatively weak, with markets still pricing in the possibility of further monetary easing. However, if the Bank of Canada (BoC) decides to keep interest rates unchanged at next week’s meeting, it could provide a short-term lift to the CAD, as markets may have overpriced the probability of rate cuts. Another potential source of support could come in early November, when the government is expected to announce a pro-investment fiscal stimulus package aimed at boosting growth and investor confidence.

  On the downside, structural risks persist. The Canadian economy has been expanding at a very slow pace and even contracted slightly in Q2 2025. Current projections suggest that inflation will continue to decline through the end of 2026, falling well below the BoC’s target, while unemployment is expected to rise before stabilizing later in 2026. Growth prospects for 2026 remain subdued. Canada’s economy is also highly open and export-dependent, particularly on the United States, making it vulnerable to any deterioration in trade relations. For these reasons, it is likely that the Bank of Canada will maintain an accommodative policy stance, which could keep downward pressure on the CAD in the medium term.
  If the BoC refrains from cutting rates this week and the government delivers the expected investment-focused package in November, the Canadian dollar could strengthen temporarily. However, the broader outlook remains bearish, as continued monetary easing and weak domestic growth are expected to weigh on the CAD into late 2025 and beyond.

AUDUSD

• The AUD/USD pair has been experiencing a period of heightened volatility in recent weeks, reacting primarily to statements and developments in U.S.–China relations. The Australian dollar is heavily dependent on the Chinese economy any deterioration in trade relations between the two major powers typically leads to a weakening of the AUD, while signs of easing tensions tend to push the currency back toward its average levels. Similar to the Canadian dollar, the Aussie is currently trading near relatively weak levels, even though the domestic economy shows gradual signs of recovery.

  On the other hand, the negative effects of U.S. tariffs imposed on Australian goods are beginning to show. According to recent surveys, about half of Australian industrial firms have reported significant losses as a result of these measures. The market is now focused on the preliminary October PMI data, which could set a new direction for the pair. Any indications of continued economic recovery, combined with inflation remaining above 2.5% and steady GDP growth, could prompt the Reserve Bank of Australia (RBA) to adopt a more hawkish stance.

  For now, however, Australia remains under pressure from strained trade relations between the U.S. and China as well as the tariff measures introduced by the United States. These factors appear to limit the upside potential of the AUD, particularly if the U.S. economy continues to show a resilient labor market and rising inflation. Under current conditions, the AUD/USD pair is likely to remain within the range of recent weeks or months, unless there is a significant shift in geopolitical tensions or economic outlook.

AUDNZD

• The AUD/NZD pair is currently trading at very strong levels, the highest in the past five years. Both the Australian and New Zealand dollars tend to react to similar geopolitical factors, particularly developments in U.S.–China relations. However, the main driver behind the recent surge in the pair was the surprise 50 basis point rate cut by the Reserve Bank of New Zealand (RBNZ) on October 8, which led to a sharp weakening of the New Zealand dollar.

  From a fundamental perspective, the AUD/NZD pair is likely to remain near its current elevated levels, although a short-term technical correction to the downside cannot be ruled out. A deeper decline, however, appears unlikely, as the Australian economy shows clearer signs of recovery, while the New Zealand economy continues to struggle. The unemployment rate in New Zealand has risen by nearly 2% since 2023, and although forecasts suggest the increase will slow, unemployment is expected to remain elevated. Inflation is projected to decline toward 2% by 2026, aligning with the central bank’s target. Yet, the combination of subdued growth and moderating inflation will likely allow the RBNZ to continue easing monetary policy, which should keep downward pressure on the NZD.

  Overall, the Australian dollar is expected to maintain its dominance over the New Zealand dollar, with markets likely to favor elevated AUD/NZD levels over the coming months.

EURGBP

• The EUR/GBP pair has slightly stabilized following the release of UK inflation data. The figures showed lower inflation than the market expected, bringing short-term relief to the pound after a prolonged period of pressure caused by a combination of tight fiscal conditions, elevated inflation, and rising unemployment. These factors had previously raised concerns about stagflation in the United Kingdom. However, the situation now appears to be gradually stabilizing, as reflected in the calming of the UK bond market, which suggests a potential easing of stagflation risks.

  Inflation is expected to continue declining in the coming months, though it will likely remain just below 4%, while unemployment is stabilizing but not yet falling. This environment provides the Bank of England (BoE) with greater flexibility in its monetary policy decisions. The market now anticipates that, given the softer inflation data, the BoE could cut interest rates by 25 basis points, a move that may ease pressure on the economy and help stabilize public debt servicing costs.

  Overall, the pound is expected to remain relatively weak against the euro, although in the longer term it could gain partial support if the UK labor market gradually improves and fiscal risks in the euro area persist a combination that could help restore confidence in the British economy.

AUDCAD

• The AUD/CAD pair is likely to trade sideways in the near term, as both currencies face similar pressures linked to geopolitical developments, particularly U.S. relations with China and Russia. At the same time, there are positive factors supporting both sides the Australian dollar benefits from signs of a gradual domestic recovery, while the Canadian dollar is supported by rising oil prices and expectations of a stable monetary policy stance.

  In November, the Canadian dollar could gain additional support, especially if the Bank of Canada refrains from cutting interest rates next week, which would be interpreted as a hawkish signal. Such a decision could strengthen the CAD in the short term, making it the favored currency against the Australian dollar. Overall, the AUD/CAD pair is expected to remain range-bound, unless a significant economic catalyst or policy shift emerges on either side.

NZDCAD

• In the NZD/CAD pair, I would continue to favor the Canadian dollar in the short term, even more so than in the AUD/CAD pair. The New Zealand economy currently lacks the positive factors observed in Australia or Canada. As mentioned with previous currencies, the Canadian economy benefits from rising oil prices, a stronger labor market, and slightly higher inflation in the latest readings, while New Zealand faces weak growth and an expansionary monetary policy, which has significantly weakened the New Zealand dollar.

  The Reserve Bank of New Zealand (RBNZ) recently surprised markets with an aggressive rate cut, putting additional downward pressure on the NZD and keeping the NZD/CAD pair at weak levels. In the near term, the pair is expected to trade sideways within a lower range, but with a downward bias (pressure on short positions). If the Bank of Canada decides not to cut interest rates next week, the pair could fall even further, where it may eventually find new equilibrium and stabilization.

Politics Moves the FX Market: Yen Slumps After Takaichi’s Election, French Turmoil Weighs on Euro, Dollar Stays in Focus

7. 10. 2025 - Josef Brynda

The foreign exchange markets have recently come under strong political influence: in Japan, the election of ruling LDP chairwoman and future prime minister Sanae Takaichi drove significant moves, while in the euro area, the sudden resignation of French Prime Minister Sébastien Lecornu shook the euro. The yen weakened sharply following Takaichi’s victory, and the euro also fell amid political uncertainty in Paris; the pound, caught between these two pressures, lost only slightly against the dollar.

During the day, the Japanese yen fell to a two-month low around 150.6 USD/JPY and to a record low against the euro near 176.4, shortly after Takaichi secured the LDP leadership. Markets interpreted her election as a signal of potential fiscal stimulus and a softer stance toward further monetary tightening, which pushed back expectations of rapid action from the Bank of Japan (BoJ). Finance Minister Katsunobu Katō warned against “undesirable volatility” and confirmed that authorities were closely monitoring currency movements.

Analysts have noted that Takaichi’s victory is more likely to slow rather than completely halt BoJ’s gradual rate-hike cycle. This continues to support the attractiveness of carry trades against the yen and helped push crosses like GBP/JPY to new short-term highs.

In Europe, attention turned to France, where Lecornu resigned just 27 days after taking office. President Emmanuel Macron subsequently tasked him with leading the final round of talks on resolving the crisis. The short lifespan of the cabinet and ongoing uncertainty surrounding the budget are increasing the risk premium on French assets, pushing the euro lower. Investors are also watching the widening spread between French and German 10-year bond yields.

From the ECB’s perspective, officials told the European Parliament committee yesterday that risks on both sides have narrowed and that inflation projections remain close to target for 2026–2027. Market interpretations of recent remarks are only mildly dovish and provide no clear signal for a rapid rate-cut cycle.

In the United States, trading was complicated by delayed key macro data due to the government shutdown: official payrolls were not released, leaving markets to rely on alternative indicators. ADP reported a decline in private employment by 32,000, the Chicago Fed estimated stable unemployment around 4.3%, and the ISM services index fell to a borderline 50 points. These signals reinforced a wait-and-see mode for the dollar, with quick repricing based on every new piece of information.

On major pairs, EUR/USD fell back toward the 1.17 area, where the market is trying to find short-term balance, while USD/JPY remains elevated above 150, supported by Japan’s political and monetary mix. The pound is losing slightly against the dollar but gaining against both the euro and the yen, as attention shifts to upcoming BoE speakers.

In the coming days, the political landscape will be key for forex markets: possible verbal or actual interventions by Tokyo against excessive yen moves, further steps by the Élysée Palace in forming a new French government, and any alternative indicators of U.S. activity until full data publication resumes.

The strength of the USD will also depend on upcoming data. If the NFP, potentially released this Friday, show job growth, it could, combined with still persistent inflation and room for further price increases, lead to a repricing of rate-cut expectations by the Fed. The dollar could then strengthen significantly toward the 1.14 EUR/USD level.

Commodity currencies, especially the CAD and NZD, have recently remained weak against the USD. In New Zealand, the central bank is expected to cut rates by 25 bps tomorrow, which could further pressure the NZD. The cut is likely due to slowing inflation and a fatigued domestic economy, with some even speculating about a 50 bps reduction. The Canadian dollar has also weakened against the USD due to low oil prices, as OPEC continues to discuss output increases, which could push oil prices even lower. As a major oil exporter, Canada is losing part of its revenue stream. Furthermore, Canada’s September manufacturing PMI fell to 47.7, indicating contraction in the sector. Output, new orders, and employment all declined. Altogether, these factors give the Bank of Canada room to continue its rate-cutting cycle.

🚨 Fundamentals Day = Volatility Alert!

25. 9. 2025 - Josef Brynda

This afternoon is fundamentally important for the U.S. dollar, as at 2:30 p.m. CET a whole set of macroeconomic indicators will be released, with the potential to significantly impact forex markets. Investors are focusing mainly on the highest-weight data, namely jobless claims, inflation measured by the PCE index, and the revised GDP growth figures.

The market expects that the number of new jobless claims (Initial Jobless Claims) will reach 233,000, slightly above the previous 231,000. Continuing Claims are projected at 1.93 million, marginally higher than before. If the figures come in lower, it would reinforce the argument of a strong labor market and could provide short-term support for the dollar. Conversely, higher numbers would indicate that the economy is starting to slow under the pressure of high interest rates.

Inflation indicators also deserve close attention. Personal Consumption Expenditures (PCE Prices) for Q2 are forecast to rise by 2.0%, compared with 3.7% previously. Core PCE, which excludes volatile items, is expected to slow to 2.5% versus 3.5% before. For the Fed, this is a crucial measure. If inflation surprises to the upside, the dollar could strengthen, as it would suggest the central bank must keep policy restrictive for longer. Weaker data, on the other hand, would open the door to speculation about an earlier policy easing and weigh on the dollar. In that case, expectations for a 25 bps rate cut in October could be fully priced in. Confirmation will come with tomorrow’s Core PCE release, which is expected to show annual growth of 2.9% and a monthly increase of 0.2%. These figures remain well above the Fed’s 2% target, so they would not, in themselves, justify imminent rate cuts.

At the same time, the revised GDP growth for Q2 will be released. The market anticipates confirmation of a solid 3.3% pace after the Q1 contraction of 0.5%. If the number beats expectations, it would be evidence that the U.S. economy remains resilient despite high interest rates, lending strength to the dollar. A weaker figure, however, could fuel concerns about a slowdown.

Another closely watched indicator is Durable Goods Orders. Overall, a decline of 0.3% is expected, following the previous -2.8%. A deeper drop would be seen as a sign of corporate caution in investment, undermining confidence in future growth.

Among less significant indicators, wholesale inventories are projected to increase by 0.2% after 0.1%, while consumer spending is expected to show a solid 1.6% rise after a weak previous quarter. The housing market, on the other hand, is likely to demonstrate further cooling, with existing home sales forecast to decline to 3.96 million compared with July’s 4.01 million.

Overall, the picture before the release suggests a combination of still solid economic growth, persistently high inflation above 2%, and mild cooling in the labor market and investment demand. If this scenario materializes, the market may interpret it as a “soft landing” for the U.S. economy. For forex, this means the dollar could react differently depending on which aspect dominates – strong GDP and low claims would support USD, while weaker PCE or investment data could weigh on it, especially against the euro.

The interest rate situation is as follows. In his latest statements, Chair Powell confirmed the Fed’s dual mandate – maximum employment combined with price stability. These two goals are beginning to diverge, making the Fed’s job more complicated. High interest rates push inflation down but at the same time create pressure on the labor market by cooling demand. This comes in a context where U.S. tariffs tend to increase costs for both consumers and businesses. The main reason for the Fed’s rate cut at the September meeting was the revision of Non-Farm Payrolls, which measure newly created/paid jobs in the U.S. If the labor market recovers, especially in this indicator, the Fed would have little room for further cuts, and the dollar could strengthen toward the 1.12 level against the euro. However, if the labor market continues to cool at a faster pace and inflation fails to accelerate, the Fed would likely proceed with another cut, and the USD could weaken toward the 1.18–1.20 range versus the euro. For investors, it will therefore be essential to monitor these two goals closely.

Fiscal Shocks in Europe: Markets Punish Deficit Policies – Is Europe on the Brink of a New Debt Crisis?

2. 9. 2025 - Josef Brynda

In the past 48 hours, European-British fiscal tensions have risen dramatically. Yields on UK 30-year bonds climbed to their highest level in 27 years – pricing around 5.68%–5.71% – signaling a sharp deterioration in debt-servicing costs for the United Kingdom. This situation was worsened by a surprising cabinet reshuffle, which the market perceives as a weakening of confidence in the government’s economic strategy and a potential departure from fiscal rules. The pound responded with a drop of about 1% against the dollar.

The euro area is also facing rising yields in bond markets. Yields on 30-year German and French bonds have approached their highest levels since the 2008–2011 financial crisis. France is particularly under market scrutiny due to an upcoming vote of no confidence in the government, expected next week. This political factor is widening the spread between French and German yields, thereby increasing risk premiums. Eurozone inflation rose to 2.1% in August, slightly above the ECB’s target, and the ECB has signaled that it does not intend to push for rate cuts, further tightening fiscal flexibility for member states.

From a sentiment perspective, markets are clearly favoring safe havens. The dollar is strengthening, and investors are moving into commodities – gold even reached a record high above USD 3,500 per ounce. The rise in gold prices signals heightened risk aversion and concerns about destabilization of the fiscal environment. On the forex markets, this translates into a sharp weakening of the euro and the pound, with higher volatility in pairs such as EUR/USD and GBP/USD. For example, EUR/GBP climbed toward 0.8685, confirming the pressure that fiscal uncertainty is exerting on the weakened currencies of the euro area and Britain.

Fundamentally, this means a narrowing of fiscal space for European governments, which face a choice between cutting spending, raising taxes, or risking a “doom loop,” where rising costs lead to eroded confidence and even higher yields. Sentiment analysis reveals that markets view political instability (e.g., in France) as a direct threat to euro stability. From a forex perspective, it is crucial to monitor further bond yields, investor sentiment, and central bank rhetoric. If the situation does not stabilize, it may lead to further turbulence: a new debt cycle, strengthening of the USD at the expense of the euro and pound, and continued growth of gold prices as an indicator of market uncertainty.

Fed Holds Rates Steady as Powell Stresses Data-Dependent Path – Dollar Strengthens

31. 7. 2025 - Josef Brynda

At its July meeting, the Federal Reserve left the federal funds rate unchanged in the range of 4.25 to 4.50 percent. Chair Jerome Powell stated that the Fed considers the current monetary policy stance appropriate as it provides room to wait for further economic data. Any potential moves at the September meeting will therefore be determined primarily based on new inflation and employment figures.

Although the U.S. economy is slowing, overall performance remains relatively strong. GDP growth for the first half of the year reached 1.2 percent compared to 2.5 percent last year. The main reason is lower consumer activity. Adjusted data, which exclude the impact of government spending, inventory changes, and foreign trade, also indicate a cooling of domestic demand. However, the Fed does not consider the situation alarming and views the economy as resilient. In the first quarter, GDP fell by 0.5 percent, mainly due to a sharp increase in imports. Companies were restocking, and the net export component therefore reduced overall growth. For the second quarter, the preliminary growth figure is 3 percent.

The labor market remains stable and close to full employment. Unemployment is still low, and neither the supply nor the demand for labor shows significant imbalances. A slight decrease in demand for workers is not considered a risk. This supports the maintenance of a slightly restrictive monetary stance aimed at preventing a renewed acceleration of inflation.

An important topic of the meeting was the impact of new tariffs. Powell acknowledged that higher tariffs are already partially affecting the prices of some products, but their overall impact on inflation remains unclear. The Fed expects rather a temporary effect, though it does not rule out the possibility of more persistent inflationary pressure. Crucially, long-term inflation expectations remain stable near the target level.

Financial markets perceived the outcome of the meeting more as a sign of caution than as a willingness to cut rates quickly. The dollar strengthened, U.S. Treasury yields rose, and the probability of a September rate cut fell below 50 percent, compared to around 60 percent before the meeting. This suggests that investors now expect monetary policy easing to occur later.

Powell repeatedly emphasized that the Fed will make its decisions based on real data. Particular attention will be paid to the Consumer Price Index to be released in the first half of August, as well as labor market figures. Powell also stated that the labor market is close to target, while inflation remains elevated. It will therefore be important to monitor, for example, Friday’s Nonfarm Payrolls report, which may provide a clearer picture of employment trends.

As we have noted earlier, it would be rather unusual under current conditions for the Fed to make two rate cuts before the end of the year. The same view was expressed by Bloomberg analysts, who, like Powell, currently see no reason for a significant monetary policy easing. For rate cuts to occur, there would need to be a sharp deterioration in the labor market or a rapid decline in inflation, which does not seem to be happening so far.

For financial markets, it will be important to watch the event referred to as Trump’s “Liberation Day No. 2,” scheduled for August 9. If it turns out that the deals are at a level that would not push the U.S. economy into stagflation, markets could continue to price in fundamental divergences that would support further strengthening of the dollar.

This has in fact been visible on the EUR/USD pair, something we have warned about in previous articles. In particular, interest rate divergence had been somewhat downplayed, with sentiment and expectations prevailing over hard data. After the agreement between the EU and the U.S., the market began to price in the divergence more strongly, and the dollar has already strengthened by almost 4 percent from its high earlier this year.

EU and US Reach Trade Deal: 15% Tariffs, Billion-Dollar Investments, and Avoidance of Trade War

28. 7. 2025 - Josef Brynda

Last night (July 27, 2025), the United States and the European Union reached a framework trade agreement setting a 15% import tariff on most European exports to the U.S., compared to the initially threatened 30%. At this stage, it is a basic political framework without a formally signed legislative agreement, leaving room for future revisions and interpretations of the provisions.

The agreement also includes EU commitments: USD 600 billion in investments into the U.S. economy and USD 750 billion in energy and military purchases (primarily LNG, oil, nuclear fuel, and military equipment). While tariffs on steel and aluminum remain at 50%, their future is tied to a transition to a quota regime.

This news initially brought some relief to both U.S. and European equity markets. However, in the current European session, the DAX is trading 0.12% below its opening price, and the S&P 500, despite opening higher, has also slipped, currently trading around +0.25% above the opening price. EUR/USD opened roughly +0.02% higher, but the dollar has since strengthened significantly and is now trading nearly +0.65% against the euro (or approximately -0.65% in the EUR/USD pair). According to  Marco Antonio Soriano - Chairman & CEO of Soriano Group & Family OfficeChairman & CEO of Soriano Group & Family Office "The 15% EU-US tariff deal increases costs for EU exporters, particularly in automotive, pharmaceuticals, and e-commerce, risking reduced competitiveness and recession in Europe. US businesses gain from EU energy and investment commitments but face potential EU retaliation and supply chain disruptions. The deal strengthens transatlantic ties, supporting the US dollar’s dominance by keeping the EU aligned with dollar-based trade, but risks remain if EU firms pivot to BRICS markets. Both EU and US businesses must adapt through cost management, market diversification, and strategic partnerships to navigate this new trade landscape."

Reuters writes that “analysts point out that large-scale European investments in the U.S. and purchases of American energy and military equipment could, in the long run, support capital outflows from Europe and strengthen the USD.”

It will therefore be interesting to see how Jerome Powell justifies these measures. Tariffs have not disappeared from the world, but they seem to have taken on a new character in the form of stability. However, this does not change the essence of the matter, only its sentiment. Tariffs initially increase net exports in the short term, but in the long term, exports tend to return to their original levels, only with a higher real exchange rate, meaning an appreciation of the currency.

The Fed meeting will take place on Wednesday, with the probability of holding rates at over 95% according to the CME Group. However, the market continues to expect two rate cuts by the end of this year. I believe, as I have previously indicated, that there will be only one cut. This week could decide the matter. Important data will be released from the U.S., especially concerning the labor market, which, if it remains stable, will help, or rather complicate a rate cut in September. On Thursday, the PCE inflation report will be published, which is forecast to rise again this month. Under such conditions, it would be very difficult to proceed with monetary policy easing.

In the USD pair, there could be rebalancing due to capital inflows into the U.S. A lower risk premium could also be required, as investors may not demand it thanks to relatively sustainable tariffs. The U.S. has had a prolonged divergence between its indicators and those of other countries, and the dollar could start benefiting more from this.

Boe's Bailey: Most crowded trade in the market is short dollars

22. 7. 2025 - Josef Brynda

In a recent statement, Bank of England Governor Andrew Bailey highlighted an interesting phenomenon currently dominating global financial markets – the record level of bets against the U.S. dollar. According to him, shorting the dollar has become “the most crowded trade in the market,” raising questions about the stability of this trend and the possibility of a reversal. Investors are heavily speculating that the value of the dollar will decline in the coming months, possibly due to expectations of interest rate cuts by the Fed, macroeconomic imbalances, or a geopolitical shift in preferences toward alternative currencies.

From a market psychology perspective, this situation is risky. Excessive concentration in a single type of trade – in this case, betting on the dollar’s decline – increases the likelihood of a so-called “short squeeze,” a sudden surge in the asset’s price as traders scramble to close their positions out of fear. Historically, such moments have often triggered volatility and corrections. Bailey is thus indirectly warning of a potential rebound of the dollar, especially if the U.S. economy proves to be more robust than currently anticipated, or if inflation in the U.S. fails to slow down.

There is also an interesting geopolitical and institutional dimension to this phenomenon. Despite its relative weakening, the dollar remains the dominant reserve currency and the primary medium for international trade. When markets place overly aggressive bets on its depreciation, any shift in global expectations – for example, a sudden hawkish statement by the Fed or geopolitical tensions – could quickly reverse market sentiment.

Overall, this scenario is far from unrealistic. Market bets on a July rate cut – or no cut – are currently around 97%, and bets that the Fed will not cut rates in September have risen from 10% to over 40%. Recently, the labor market has shown stronger-than-expected figures and surprised the markets, with inflation also rising according to the latest CPI reading. For instance, jobless claims have reversed and are now in a downward trend, signaling a robust labor market. If the labor market maintains its strength and inflation continues to rise, I do not believe the Fed will make two rate cuts this year. A major milestone for decision-making will be August 1st, especially regarding which tariffs will or will not be imposed. Additionally, Fed Chair Jerome Powell has a scheduled briefing today, where he may outline the Fed’s future direction for monetary policy.

CPI ahead - What to Expect?

14. 7. 2025 - Josef Brynda

Tomorrow, one of the key macroeconomic indicators will be released – the Consumer Price Index (CPI) in the United States. This indicator reflects the development of prices for goods and services commonly purchased by consumers and serves as a direct measure of inflation, which has a significant impact on both the cost of living and the monetary policy of the Federal Reserve (Fed).

Analysts expect that core CPI, which excludes volatile food and energy prices, will rise by 0.3% month-over-month in June, representing a slight acceleration compared to previous periods. The annual headline CPI is projected to increase from 2.4% to 2.6%, a two-tenths of a percentage point rise. This inflation data may partly reflect the impact of tariff measures, as Powell himself mentioned that these indicators should start to show upward movement in July and August due to tariffs.

The outcome of tomorrow’s data will serve as an important guide for the future direction of US monetary policy. At this moment, markets assess that the Fed is unlikely to make any changes to interest rates at the July meeting, with current data showing a 93.3% probability of keeping rates unchanged. Much greater attention is focused on September, where markets currently assign a 57.2% chance of a first rate cut of 25 basis points.

Tomorrow’s figures will be crucial for the US dollar. Last week, the dollar consolidated from its recent lows, especially after the release of strong labor market data. Higher-than-expected inflation data could lead to a strengthening of the dollar, as it would reduce the likelihood of a rate cut in September and support the Fed in maintaining higher interest rates for longer. On the other hand, lower-than-expected inflation could revive expectations of an earlier intervention by the Fed and weaken the dollar in foreign exchange markets.

In any case, tomorrow’s CPI release will be one of the key events of the July macroeconomic calendar, and its impact on the markets, especially currency markets, could be immediate.