Dollar on Edge: Data, Dovishness & the Tariff Timebomb.
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USD: Powell reaffirmed a data-dependent Fed; strong US data has cooled immediate rate cut bets but risks remain if payrolls disappoint.
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Markets: JOLTS and ISM surprised to the upside, bolstering the dollar temporarily; inflation signs are sticking around.
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Policy risk: The US Senate passed a major debt-boosting bill; muted bond reaction may not last if inflation picks up.
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Trade tension: Tariff concerns return ahead of Trump’s 9 July deadline, posing downside risks for the dollar.
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EUR/GBP: Euro supported by calm ECB and strong FX talk; sterling steady despite UK fiscal reversal and higher tax risks.
USD: Data-Driven Dollar, Tariffs Loom
Fed Chair Jerome Powell struck his usual cautious tone at the ECB’s Sintra forum, sticking to a strict data-dependent stance that leaves the dollar highly reactive to inflation and employment prints. Notably, he didn’t rule out a July rate cut—so if tomorrow’s jobs report underwhelms, markets may fully price in imminent easing.
Still, data out yesterday temporarily firmed up the dollar. The May JOLTS report came in strong—more job openings and quits, fewer layoffs—contradicting market expectations of cooling. Meanwhile, the ISM manufacturing index surprised on the upside and the “prices paid” component bounced back. These indicators hint at sticky inflation and a sturdy labour market—not exactly fuel for urgent rate cuts. With markets leaning overly dovish, we see scope for renewed dollar support as inflation perks up.
In Washington, the Senate squeaked through a revised version of Trump’s debt-expanding BBB Act, now awaiting House approval. The CBO estimates it will add $3.3 trillion in debt over 10 years, yet Treasury yields barely budged—thanks to lingering hopes of Fed easing. That said, upside inflation surprises could still rattle bonds down the line.
Dollar downside risks have moderated for now, but soft surprises in today’s ADP jobs data or tomorrow’s payrolls could reignite expectations of a July cut. And with trade tensions creeping back in—Trump’s 9 July tariff deadline is in focus—markets are watching for signs of last-minute escalation or retreat. The risk for the greenback remains tilted to the downside heading into next week.
EUR: Calm from ECB, but Watch That 1.20 Level
ECB policymakers stayed quiet on monetary policy in Sintra, as expected following June’s hawkish pivot. They’re now in wait-and-see mode. June flash CPI showed German inflation slowing unexpectedly to 2.0%, while eurozone inflation ticked up slightly, with core holding steady at 2.3%. None of this moved the dial—markets still expect a first cut in December.
What did get attention was euro strength. ECB Vice President Guindos said EUR/USD at 1.20 is “acceptable” but warned a fast move beyond could be problematic—a view echoed by other officials. Though President Lagarde continues to promote the “global euro,” she’s remained tight-lipped on FX levels.
More ECB speakers are lined up today, but with little expected impact. As always, EUR/USD remains at the mercy of the dollar. If US jobs data misses badly, a spike toward 1.20 can’t be ruled out.
GBP: Policy U-Turn Points to Higher Taxes
The UK government has axed a controversial benefits cut bill, originally intended to save £5bn, after Labour backbench resistance. Politically, this adds pressure on PM Starmer’s leadership and increases the likelihood of tax hikes this autumn.
Markets took it in stride. Gilts stayed calm, helped by BoE Governor Andrew Bailey hinting at a possible slowdown in quantitative tightening—potentially easing pressure on long-end liquidity. Sterling also held up on the day.
With no major UK data out today, attention shifts to BoE dove Alan Taylor’s panel appearance alongside ECB’s Lane. EUR/GBP remains tilted upward, and the welfare reversal hasn’t changed that trajectory. Upcoming UK data will determine whether EUR/GBP can make a sustained break above 0.8600.