AI’s lodestar meets the Fed’s crossroads: Dovish cycle or hawkish cut ?

Wall Street entered the week on the heels of a roaring rally — the Dow breaking into record territory, the S&P brushing against its own peak, and the Nasdaq lifted on the thermal winds of Powell’s dovish pivot. The market is running with its chest forward, but it’s still waiting for the next flag to drop: Nvidia’s earnings, the week’s actual litmus test.

Overnight, the Nasdaq lifted on Nvidia as analysts kept recalibrating price targets higher, convinced the AI lodestar still has plenty of wattage left. What began as cautious optimism has turned into a gravitational force — every whisper of stronger demand, every tweak in forward guidance pulls more capital into its orbit. Nvidia isn’t just moving the tape; it’s setting the tempo of the entire market’s heartbeat, dictating the cadence of risk like a metronome for global equities.

Nvidia has become more than just a stock; it’s the gravity well at the center of the equity universe. Its silicon arteries pump through the veins of the Magnificent Seven, and its chips fuel the AI frenzy that has defined this cycle. With shares nearly doubling since April’s lows and sitting just shy of fresh records, the market isn’t simply asking if the numbers will be good — it’s asking whether they’ll be good enough to justify the fever. The whisper is $46 billion in revenue, a dollar a share in earnings, but what matters more is guidance: confirmation that AI demand is not just hot, but molten. Anything less, and the air pocket under tech could widen fast. Dell and Marvell follow on Thursday, but Nvidia alone carries the torch.

Yet as traders orbit Nvidia, another star rises on the horizon: Friday’s PCE inflation report, the Fed’s chosen compass. Core PCE is expected to tick up to 2.9% year-on-year, the fastest pace in five months. It’s a perilous cocktail — inflation edging higher, jobs softening, policy caught in a vice. Powell’s Jackson Hole tilt toward accommodation ignited risk appetite, but the ten-year holding above 4.25% stood with arms crossed, a sentinel unmoved, warning that inflation risk hasn’t left the room. The two-year may slip, the dollar may wobble, but the long end refuses to kneel.

Money markets now price an 85% chance of a September cut. The real question is how it’s framed: a dovish cut, the opening act of an easing cycle with more to follow, or a hawkish cut, a one-and-done move for 2025 acknowledging labour market cracks while keeping inflation concerns on the menu. Powell has given markets permission, but not a blank check. The hydrant isn’t wide open. Payroll revisions hint at mounting weakness, but sticky prices may still steady the Fed’s hand. Traders are thirsty for a torrent of liquidity; the market may be rationed only a trickle.

After EUR/USD flirted with 1.17 and USD/JPY slipped into the 147s, the round-trip faded and familiar ranges reasserted themselves. The dollar has already begun clawing higher, buoyed by AI-fueled equity strength and by short-dollar traders second-guessing whether they heard Powell right. The recoil underscores a simple truth: dovish whispers don’t topple the dollar — they must be translated into real policy action before FX trends can truly take flight.

And that’s the crux — the question was never about September itself, but what follows. Is the Fed opening the door to a genuine easing cycle, or merely cracking it for a one-off move? The answer will decide whether the dollar breaks down or simply shrugs and marches on in familiar territory.

For EUR/USD to punch higher or USD/JPY to press lower, the Fed will need to do more than murmur about “adjusting policy.” It would take an open hydrant — successive cuts spilling into 2026 — to truly wash through the ranges. That depends on the weaker US economic data’s cooperation, and for now, the dice are still tumbling across the felt.

Meanwhile, across the Atlantic, Europe’s engine is sputtering. Germany’s Mittelstand — that famed backbone of industry — is buckling. SMEs are reporting contracting revenues, falling employment, and fading investment. A structural rot lurks beneath the fiscal band-aids. The old growth model of cheap Russian energy and export windfalls has been buried, and the replacement is still a blueprint. For EUR/USD, Powell’s dovish breeze offers lift, but without Germany’s industrial core firing, the euro’s rally risks running out of oxygen.

So the week narrows into two focal points: Nvidia on Wednesday, PCE on Friday. One tests whether the AI-fueled rally still has thrust, the other whether Powell’s liquidity stream widens into a flood. The Magnificent Seven carry an outsized share of the S&P’s weight — 8% from Nvidia alone — and concentration risk means their execution is the market’s execution. The margin for error has shrunk; elevated valuations raise the bar. Any stumble could trigger an air pocket.

For now, the street drinks greedily from Powell’s dovish stream, Nvidia looms like a lodestar, and traders surf a wave of liquidity and optimism. But the ten-year yield stands like a stone in the current, whispering a reminder that markets float until they sink — and even the strongest thermals eventually give way to the 10-year yield gravity.