Is macro taking the wheel?

FX markets are adjusting to tariff uncertainty not with panic, but with the cold discipline of a veteran trader who’s seen this movie before. The headlines may be noisy—Trump floating 35% tariffs on Canadian goods and teasing a hike in blanket rates to 15–20%—but the reaction in currency markets has been orderly, almost indifferent. Tariffs are now priced as background noise, more a known unknown than a shock catalyst. The real FX price discovery machine is now wired into macro data, especially the inflation circuit.

Yesterday’s fifth consecutive drop in initial jobless claims acts like another barbell plate on the side of “wait and see” for the Fed. At 227,000, it’s the lightest print in two months—hardly a flashing recession signal. But continuing claims have ticked up, a sign that the job ladder may be missing a few rungs for those who’ve fallen off. Still, the labor market doesn’t look like the trigger that will force Powell’s hand. That baton has passed to CPI.

Tuesday’s inflation print is now the main event—positioning across FX desks is coiling in anticipation. The market has circled 0.3% MoM core CPI as the line in the sand.

The US dollar, meanwhile, is showing signs of data sensitivity rather than political sensitivity. The DXY added another 0.2% overnight, lifted by rising Treasury yields. This is classic macro flow: fundamentals over rhetoric. Tariff noise, unless it directly targets a heavyweight like China or the EU, is background chatter. The FX market is running a regression model, not reacting to headlines. And right now, the independent variable is inflation.

In Canada, the loonie is trading with a headache and a blindfold. Trump’s tariff threat adds political risk, while today’s domestic jobs data may expose a soft underbelly. Consensus expects no change in employment, but with unemployment creeping up to 7.1% and recent budget cuts still working their way through the real economy, the risk is skewed to the downside. A miss here could light the fuse on a fresh round of BoC easing bets—maybe not for July 30, but soon after. Until there's clarity on whether USMCA exemptions hold, CAD is a tradeable headline risk—not a fundamentals trade.

In Europe, EUR/USD is still dancing to the Fed’s tune, not Brussels’ or Frankfurt’s. The lack of updates on EU-US trade talks keeps that tail quiet. The euro’s fate, for now, is tied to how hot Tuesday’s CPI runs. That said, we’re seeing some early political pressure creep into ECB commentary—France’s Bayrou urging looser policy may not tilt the Governing Council, but it hints that euro strength is starting to pinch exporters and test political patience.

As for the pound, May’s weak GDP print is being written off by markets as statistical noise—largely front-loaded activity from Q1 ahead of the stamp duty change. The BoE sees through it, and so does FX. Sterling trades flat today, but next week’s jobs report could deliver more color—and possibly tip the scales toward faster easing, especially if wage growth stalls.

In sum, this is a market in waiting—coiled, alert, but not overreacting. FX is pricing with a scalpel, not a hammer. Tariffs are part of the scenery, but the next big move hinges on whether inflation data flips the script on Fed expectations. Until then, we’re in a rangebound regime driven by short-term recalibration—not regime change.

Europe’s currency power play: When winning the reserve race starts to hurt

In currency markets, power is a privilege—but also a liability. Europe is inching toward an elite club, experiencing the early aches of a high-class problem: what happens when your money becomes too desirable.

The euro may not yet be the main act in the global reserve currency theater—the U.S. dollar still headlines—but it’s getting more stage time. Central banks, institutional allocators, and even equity fund managers increasingly see the euro not just as a hedge, but as a strategic core holding. As the currency climbs the global ranks, some policymakers in Frankfurt are quietly pouring champagne. Others are reaching for aspirin.

A 13% rally in the euro this year has made it one of the top-performing majors—helped along by Donald Trump’s broadside attacks on the dollar, including tariff threats and monetary jawboning. The move isn’t just about flows—it’s symbolic. Investors, spooked by dollar weakness, are scrambling for alternatives. In smaller economies, hedging dollar exposure is costly and complex. The shortcut? Buy euros. This has turned the common currency into a sort of safe haven with yield optionality, even for those outside Europe.

But in markets, as always, someone pays the price.

Exporters feeling the heat

For European corporates—especially exporters—this is a classic case of the currency working against them. A rising euro eats into competitiveness abroad, and this time, it’s colliding with weak global demand and fresh tariff risks. It’s no surprise that earnings revisions across the Stoxx 600 have been slashed from 9% to just 2%, with the hardest cuts hitting export-heavy names. Think of it as gravity reasserting itself after a levitation trick: stock prices can’t float forever if earnings are slipping through the cracks.

As Barclays researchers note, euro strength paired with strong growth, as seen in 2017 or the post-COVID rebound of 2020–21, isn’t necessarily a headwind. But right now, the growth backdrop is thinning, and the tariff overhang adds an extra weight on the barbell. It’s a double whammy: weaker global demand and a stronger euro choking off external revenues. If you’re running a DCF model in Frankfurt or Milan, your top line just got more expensive to sustain.

ECB in a bind

The European Central Bank, too, is getting that familiar uncomfortable feeling—like a central banker watching the euro move two handles too far, too fast. They won’t say it outright, of course. No central bank wants to be seen targeting exchange rates. But you can already hear the subtle shift in tone—ECB Vice President Luis de Guindos warning of overshooting, and June’s 25bp rate cut partially pinned on the rising euro suppressing imported inflation. That cut likely wouldn’t have happened if the single currency hadn’t gone vertical.

The challenge is delicate: the ECB wants inflation back near target, but a stronger euro works against that by cheapening imports and squeezing export volumes. It’s monetary policy with one foot on the gas and the other on gravel.

Breaking $1.20: A pressure point in waiting

With the euro trading around $1.17, the market is already buzzing about $1.20. Not just because it’s a psychological milestone, but because breaking through it could flip the ECB’s implicit discomfort into something more tactical. The FX market is orderly for now, but don’t mistake that calm for stability. Get above $1.20, and we enter a new regime—where ECB officials may have to start massaging the tape more forcefully, even if they stop short of intervention.

As Scott Bessent aptly put it, “Europe should be careful what they wish for.” The global demand for euros may be a compliment—but like a stock becoming a crowded long, that demand carries risks. The higher it goes, the more it distorts the fundamentals on the ground. Right now, euro strength is just annoying. But left unchecked, it could soon become a constraint on growth, a drag on inflation, and a headache for policymakers who may end up cutting more than they’d like just to keep the currency in check.

Markets love to chase strength—until that strength bites back. Europe is learning that lesson in real time.