It’s hard to know which bounceback to believe – Dollar down or up?

Outlook

It’s hard to know which bounceback to believe—dollar down or up?--and the charts are not helpful. Ping-pong, pinball, whatever the term, this is a consolidation with mixed clues. It’s usually a mistake to look to current events for clues, but this time, to look at the economics is not helpful, either. Labor market or inflation? Powell seems to have answered labor market, but to knit that into the looming inflation picture takes some near-impossible handiwork. It takes a giant leap of faith to believe the tariff inflation effects will be a one time and transitory thing. We don’t buy it for minute.

Traders of all stripes tend to brush off political stuff. We are surprised that the Trump firing of a Fed official is an exception, at least so far. It came in the evening, so after everyone was set up for the overnight markets, and disrupted everybody who thought they had a proper forecast in hand. The question now is whether the threat to the Fed’s independence is a hill that Trump is wiling to die on—at the markets’ hands—or will he TACO?

Under normal conditions, we’d say the uproar would fade away and Trump will get his way. And the stock market recovered yesterday with futures pointing up, so equities are more interested in Nvidia than in the Fed. The bond market response would be clearer. Reuters’ Dolan writes “… political tensions surrounding the Federal Reserve have seen two-year Treasury yields plunge to near four month lows and the 2-30 year yield curve steepen more.” The 2-year is the lowest since May at 3.65% while the 30-year yield is over 4.90%. 

All the same, to blame the bond and dollar gyrations on the stock market or Trump is not how we normally do things. Having said that, we have been blind-sided by Trump before and are trying not to give up the dollar bear orientation. But other currencies are not cooperating. France may have to hold a snap election on Sept 8, which some say is dragging down the euro. We’d guess German economic conditions count more and see those great outcomes in Spain, but never mind. The FX market can be flighty when it wants to. Then there’s the UK, which continues to have the highest yields, and Japan, which mysteriously declines to raise theirs. 

Forecast

Periods of consolidation are always losers for traders. We are drowning in losses. The charts are confusing—the 240-minute says sell and the daily says buy. On the current affairs spectrum, we have to be dollar bears, but then there is that new pesky French fiscal recklessness to consider. Longer-run, but which we mean to Friday’s inflation release or may maybe even the next payrolls, the dollar can surprise to the upside, but don’t be fooled—Trump will drag it down again.

Food for Thought: ECR Research has some trenchant comments on France and why it’s dragging down the euro.

An audacious gamble. Markets are – for now - ignoring the escalating Trump-Fed conflict, instead focusing on France's political crisis, which has sparked a sharp selloff in stocks and bonds in the euro zone's second-largest economy.

In the grand theater of French politics, Prime Minister François Bayrou stands as the beleaguered conductor of a discordant orchestra. Bayrou is a centrist stalwart whose tenure, barely nine months old, hangs by the slender thread of a confidence vote set for September 8, 2025. This high-stakes wager, announced unexpectedly on August 25, ties the fate of his minority government to an austerity blueprint designed to scale back a €3.4tn debt mountain that looms as formidable as the Alps (the public debt is equal to 114% of GDP and trails only Greece and Italy in the Eurozone). France's aging population, high unemployment, and waning growth amplify the urgency.

Bayrou wants to pull back on the fiscal reins, and every sane economist agrees. But the voters almost certainly do not.

We should point out that ever since the Grexit crisis a decade ago, obedience to the EU’s fiscal rules has been deteriorating. Covid very nearly ended any idea of fiscal discipline. In  way, this is as serious as Trump taking over the Fed and other US institutions. The euro had a hope of replacing the dollar as the primary reserve currency specifically because of fiscal propriety, especially in the face of US recklessness. At least according to conventional economics. 

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