Incoming US data takes the wheel as Dollar data sensitivity spikes

FX Markets have pivoted into data-dependent mode, and the dollar is now dancing to the beat of each print. With Powell wrapping up his testimony by offering little more than conditional dovishness and hawkish hedging, the burden has shifted squarely to the incoming macro data. Softer inflation may have failed to shake the FOMC tree, but a weaker labour market just might.

The setup is straightforward: geopolitical risk has faded, inflation has cooled but not collapsed, and now employment metrics are moving to center stage. Durable goods and jobless claims today, followed by PCE tomorrow, will be scrutinized through a singular lens—can they flip a few Fed hawks who are already showing signs of discomfort? With Waller and Bowman breaking ranks and Trump ratcheting up pressure—possibly even eyeing an early Powell replacement—the FX market is increasingly willing to front-run a policy pivot.

Rate expectations reflect that tilt: 60bps + of easing priced in by year-end, and a notable chance of a cut at the July 30 meeting. Short dollar positions have gained some momentum here, but DXY is now at levels where the likelihood of further downside is increasing. Absent a sharp repricing of Fed policy.

As for EUR/USD, it’s broken through the 1.1630-50 resistance and is testing the 1.1700 level—a well-defended zone littered with option strikes. The euro’s fundamentals haven’t exactly improved, but this is a dollar story through and through. A clean break above 1.170 would open the gates to a run toward 1.20, but reaching there likely requires more cracks in U.S. data or a clear dovish shift in Fed speak. Lagarde and other ECB officials may offer some colour, but unless they deliver a surprise, the euro's fate still hinges on the next U.S. data print, not Frankfurt.

Middle East risk priced out, US exceptionalism priced in? Not so fast

Markets may be breathing easier, but let’s not confuse a tactical pause for strategic resolution. The Iran–Israel flare-up, once a candidate for oil market chaos, has officially been shrugged off. Brent’s back to pre-conflict levels, and Polymarket odds have collapsed on the “Strait of Hormuz shutdown” scenario. Tehran’s retaliatory restraint—hitting a lightly staffed US air base and avoiding any severe oil market disruption—sent a clear message: they’re not looking to torch their economy to make a geopolitical point.

The takeaway? Markets don’t care about centrifuges unless tankers stop sailing. With Strait of Hormuz flow intact and no hard evidence that the bunker-busting strikes crippled Iran’s nuclear progress, oil traders are back to fading fears and selling premiums. The Middle East has returned to background noise—until the next flare.

But zoom out and you’ll see Trump’s string of geopolitical gambits is feeding a different narrative: a revival of the "America is back" trade. The ceasefire win gives him a diplomatic feather, sure—but the real market juice is coming from the unexpected defence spending coup at NATO. That 5% GDP target lit up European defense names and reminded the street that Trump doesn’t just rattle sabers—he sometimes cashes the check.

Still, the so-called “US exceptionalism 2.0” needs a reality check. Treasury Secretary Bessent might be getting his wish list—lower yields, softer crude, a weaker dollar—but the flow data tells a more nuanced story. Europe and global ex-US funds are quietly attracting more capital. The TACO trade (Trump Always Chickens Out) may be morphing, but it's far from a full-blown U.S. rotation story.

Tariffs remain the wildcard. They’re sticky, inflationary at the margin, and enough of a risk factor to keep the Fed on edge. Rate differentials no longer anchor the dollar the way they used to, and if Powell gets leaned on politically to cut too soon, the greenback could slip not just on yield erosion, but on institutional credibility.

No question “ The Street” has it right—the odds are tilted toward macro stress showing up before inflation rolls over cleanly. Either the labor market cracks, or the tariff drag bites into margins and prices. Both outcomes cap the upside for the dollar and risk premium on U.S. assets.

Bottom line: the geopolitical premium may have bled out of oil, but it’s been recycled into defence stocks and currency volatility. U.S. markets look calm on the surface, but the “exceptionalism” trade still has more to prove before it runs. For now, it’s positioning, not conviction.