Powell’s razor’s edge

Priced to perfection? Nothing ever is….

It feels like I’m sitting in a crowded dealing room before the bell, every trader with one eye fixed on Powell’s hand and the other glued to the screens. A 25bp trim is all but ordained — the “priced-to-perfection” cut that keeps the front end chained to its rails. But the real drama lies in the shading of the move. A dovish 25bp and the crowd exhales; a hawkish 25bp and you wonder why light the fuse at all. That’s why another argument making the rounds is simple: if Powell wants to strike a hawkish chord, the sharper logic points to a bigger blade — a 50bp slash that drowns out the music and lets him sound tough even as he delivers relief.

The long end is the real high-wire act. At the front, traders are chained to the Fed’s path like carriage horses—tied at the hip to the next rate cut and already well ahead of the curve. But 10s and 30s? They’re free agents, torn between the gravity of weakening growth optics and the helium of sticky inflation that could re-inflate yields once the novelty of the first cut wears off. We’ve seen this movie before in late 2024—cuts coinciding with firming growth and sticky prices—but this time the economy’s complexion looks softer, a touch more fragile. The risk is rate relief blunts recession fears only to stir the embers of inflation, yanking long yields higher just as traders had settled into the ride lower.

Across the Atlantic, Bunds are caught in the jet wash. The 2y Schatz clings near 2%, a passenger more than a driver, while the 10y keeps probing the ceiling above 2.7% without conviction. For now, the German curve takes its cues from Washington rather than Frankfurt. Yet in the shadows, the ultra-long end is already scripting its own narrative—pension reforms, issuance calendars, and central bank balance sheet tweaks are whispering louder than Fed fireworks. It’s here that supply/demand physics, not Powell’s tone, may decide the next breakout.

For FX, the setup is surgical: the dollar has priced the cut, but the dollar hasn’t priced the theater around it. A vanilla 25bp dovish cut, and USD softens at the margin—think of traders selling the news in a crowded room. A surprise 50bp, and Powell can play hawk all he wants, but the dollar will likely stagger lower under the sheer size of the move. The real danger is the long-end revolt—if inflation fears resurface and UST yields climb post-cut, then the greenback could find a second wind.

The tape is coiled like a spring. EUR curves straddle the line between domestic strength and imported US direction, Bunds are leaning but not breaking, and the dollar sits at the fulcrum, waiting for Powell’s hand to tip the scales. On this razor’s edge, it won’t be the cut itself that matters—it’s the choreography of Powell’s words against the backdrop of the bond market’s response that will dictate whether the dollar drifts, dives, or claws back the high ground.