AT A GLANCE
United States Policy and a Global Slowdown: The narrative of United States economic strength has fractured. Following a series of weak economic reports, the Federal Reserve has signaled a clear shift towards cutting interest rates. This dovish pivot is weighing on the United States dollar, and the upcoming United States employment report on September 5 will be the next critical test of this new reality.
The New United States Tariff Regime: An aggressive new "reciprocal tariff" regime is acting as a drag on the global economy while creating unique inflationary pressures within the United States. Early data from producer prices suggests these tariffs are pushing costs higher, raising fears of stagflation. The upcoming Consumer Price Index report on September 10 will be the first major indicator of whether these costs are being passed on to consumers.
Divergent Central Bank Paths: While the United States Federal Reserve pivots towards easing, other major central banks are on different paths. The European Central Bank has adopted a cautious "wait-and-see" approach, balancing stagnant growth against persistent inflation. This policy divergence is a primary driver of currency valuations, and the upcoming European Central Bank meeting on September 11 will provide crucial guidance on its future direction.
United States Policy Whiplash and the Global Slowdown
Market whiplash! The Fed's dovish pivot at Jackson Hole has traders pricing in rate cuts. But is the US economy truly faltering? All eyes are on the August Nonfarm Payrolls report this Friday, September 5, for the next major clue 📉
The Fed's Dovish Pivot Meets Economic Reality
Market expectations for United States Federal Reserve policy have swung dramatically, creating significant uncertainty for the USD. A period of extreme data volatility challenged the narrative of a resilient American economy, forcing traders to constantly reassess the timing and magnitude of expected interest rate cuts. This confusion has broken the theme of "United States economic exceptionalism" and aligned the US outlook more closely with the weakening growth trajectories already evident in Europe and China.
Trigger Event: The theme was initiated on July 30, when the Federal Reserve held interest rates steady. Chair Jerome Powell's accompanying commentary was interpreted as hawkish as he downplayed the likelihood of a near-term rate cut. This stance was immediately challenged by the disastrous July jobs report, released August 1, which showed the economy adding a mere 73,000 jobs alongside massive downward revisions of 258,000 for the prior two months, directly contradicting the Fed's resilient narrative.
Most Recent Key Event: The pivotal event was Federal Reserve Chair Jerome Powell's keynote address at the Jackson Hole Economic Symposium on August 22. He signaled a distinct dovish shift, highlighting that the "shifting balance of risks may warrant adjusting our policy stance," with a clear focus on the softening labour market. The market reacted swiftly, with the probability of a September interest rate cut surging to approximately 91 percent. This triggered a sharp sell-off in the US dollar, with the DXY index falling over 0.7 percent, and ignited a powerful global rally in risk assets.
Nearest Upcoming Key Event: The release of the United States Nonfarm Payrolls report for August on September 5 will be a critical test. It is the first major employment report since Chair Powell's dovish pivot. Another month of significant weakness would confirm the US economy is on a clear downturn, likely validating the Fed's stance, intensifying expectations for aggressive rate cuts, and putting further downward pressure on the United States dollar. Conversely, a surprisingly strong report would introduce significant confusion and could provide short-term support for the dollar.
The New United States Tariff Regime and Its Stagflationary Shadow
The new US 'reciprocal tariff' regime is in full effect, and the first signs of inflation are showing. A hot PPI report has raised stagflation fears. The big question: is it hitting consumers? The August CPI data on Wednesday, September 10, will be critical 🔥
A Structural Drag on Growth, A Direct Boost to Inflation
The new tariff regime represents a significant structural shock to the global economy. Exceptionally high rates, including a 35 percent tariff on Canadian goods and a 39 percent tariff on Swiss exports, create a dual impact: they act as a drag on global growth while simultaneously creating an inflationary impulse within the United States. This dynamic raises the challenging prospect of stagflation—a combination of slowing economic growth and rising prices.
Trigger Event: This theme was initiated on July 31, when the United States administration announced a series of new, specific tariff rates ahead of its August 1 deadline. These included punitive levies such as a 50 percent tariff on most Brazilian imports and a 25 percent tariff on goods from India, signaling a broad and aggressive protectionist stance.
Most Recent Key Event: The release of the stunningly hot United States Producer Price Index (PPI) for July on August 14 was the most recent key event. The 0.9 percent month-over-month surge was the largest in three years and was widely interpreted as the first clear evidence of the inflationary impact of the new tariffs being passed through to producer prices. This data completely erased market bets on a larger 50-basis-point rate cut in September and caused the USD to rebound sharply.
Nearest Upcoming Key Event: The release of the United States Consumer Price Index (CPI) for August on September 10 will be the next pivotal event. This report will provide the first major reading on how the newly implemented tariffs are impacting consumer prices. A hot number would intensify stagflation fears, complicate the Federal Reserve's policy decision one week later, and could provide short-term support for the United States dollar as it would limit the central bank's scope for aggressive rate cuts.
The Great Monetary Divergence: The ECB's Cautious Path
As the Fed pivots dovish, the ECB remains cautious, balancing stagnant growth against sticky core inflation. This policy divergence is a key driver for #EURUSD. All eyes on the ECB's monetary policy meeting on Thursday, September 11, for the next move. 🇪🇺🇺🇸
A Widening Chasm in Central Bank Policy
The era of synchronized central bank policy is over, giving way to a significant divergence that is creating relative value opportunities in the currency market. The Federal Reserve's dovish pivot stands in contrast to the European Central Bank's more cautious approach. The ECB is caught between a weak growth outlook—with Germany's economy contracting by 0.3 percent in the second quarter—and persistent domestic price pressures. This has led the bank to adopt a "wait-and-see" stance.
Trigger Event: The theme of a cautious ECB was triggered at its policy meeting on July 24, where the central bank held its key interest rates unchanged. President Christine Lagarde adopted a "wait-and-see" stance, emphasizing that while disinflation was developing in line with forecasts, the bank needed more clarity on economic developments before signaling its next move.
Most Recent Key Event: Weak economic data confirming the Eurozone's sluggish momentum was the most recent influential event. Data on August 14 showed the economy grew by a mere 0.1 percent in the second quarter, while industrial production contracted by a larger-than-expected 1.3 percent in June. This was further confirmed by the final German GDP print on August 22, which showed a 0.3 percent contraction. This gloomy data reinforces the ECB's dilemma.
Nearest Upcoming Key Event: The European Central Bank will hold its next monetary policy meeting on September 11. The decision and subsequent press conference will be closely watched for the bank's assessment of the new US tariff impact and for any forward guidance on the timing of potential future rate cuts. A continued cautious hold could support the Euro relative to the United States dollar, while a surprisingly dovish turn would weigh on the single currency.