Weak foundations
After a rally of around 15% year to date, there is significant cognitive and technical room for consolidation within EURUSD. Implied volatility has been rising given the macroeconomic backdrop that markets have encountered this year. Even within such an environment, a 15% rally in the market’s most traded instrument is still enormous. But there is only one, perhaps two if you are generous, factors allowing the Dollar to explore that hypothetical chasm. The one main element is the Fed and closely related to that are labour market and inflation statistics remaining favourable to the Fed’s resolve.
Earlier this year as Trump took aim for Jay Powell’s job, the Dollar faced selling pressure. Sure, USD was already dented by tariff risk and uncertainty but there was an undeniable influence of the risk to Fed independence encouraging that sell off also. This is because an independent central bank is seen as essential if the Dollar is to retain reserve currency status. However, Trump’s wishes have so far not progressed. Powell remains in position and when questioned on Trump’s comments Powell has been quick to assert the Fed’s legal independence and confirm he would not step down at the President’s request.
This has reassured markets and allowed for a consolidation in the Dollar. It so happens to be the case also that this Fed under Powell may be looking to keep rates on hold for longer than many had thought possible earlier this year. That is in many respects down to robust labour market data as well as the expectations that price pressures may rise over the next few months. This may pave the way for just one or even no cuts come December. At the same time, Eurozone rate expectations continue to decline with the benchmark rate at real risk of falling below 2%. This tailwind has allowed the Dollar to consolidate but it is clear that these foundations remain vulnerable to change based on data or a doubling down of political pressure from the White House.
Discussion and Analysis by Charles Porter
Related Insights
Daily Brief – Defiance
Charles Porter
Tue 12 May 2026
Defiance Yesterday’s market was defying one of two things: logic or gravity. Come to think of it, perhaps both. Take cable, GBPUSD, yesterday. The key events beyond minor data releases centred around any chatter from either side of the Iranian conflict and Starmer singing for his supper. Sing he did and tweet the President did, […]
Daily Brief – Short-lived relief rally
Charles Porter
Tue 19 May 2026
Short-lived relief rally A tantrum in the bond market has continued to erode away at risk conditions in recent sessions. In the UK, the sell-off in gilts and corporate bonds has been particularly acute thanks to heightened political instability, the origins of which we have covered thoroughly in recent briefings. Yesterday, headlines delivered enough optimism […]
Daily Brief – Room to manoeuvre
Charles Porter
Tue 26 May 2026
Room to manoeuvre Kevin Warsh was sworn into office at the White House on Friday. Despite limited market movement on Friday, many prices gapped significantly come the open yesterday. Whilst the UK and US observed a bank holiday yesterday, many indices and currencies were on the move. The theme across the market was risk on […]
