Waiting for the chamber to fire, FX dances in tariff twilight

For today, anyway, the FX markets feel like it’s caught in a dimly lit dojo—nervous feet, twitchy hands, and no clarity on where the next punch is coming from. The July 9 tariff deadline looms large, and President Trump isn’t blinking. He’s made it clear—no extension, no mercy. The tariff gun gets cocked next week, and the market’s still guessing which chamber fires.

In the meantime, the dollar is doing its best impression of a streetlamp in a fog—throwing just enough light to see the cracks, but not enough to find solid momentum. Stronger-than-expected JOLTS and ISM numbers should’ve steadied the buck’s footing, but the bounce was more flinch than conviction. Powell’s data-dependent mantra in Sintra added nothing new, but his refusal to rule out a July cut means the next few data points carry an outsized payload. Every job number now walks in like it’s strapped with TNT.

Traders are left squinting at the incoming ADP print and tomorrow’s NFP like codebreakers before tariff D-Day. One sharp miss and the market will throw open the rate-cut floodgates. And overlaying that is the Big Beautiful Bill—a fiscal bazooka disguised as policy reform—still crawling through Congress. The CBO’s debt forecast now rounds up to $3.3 trillion and climbing, but the bond market seems too distracted by the promise of cuts to price the cost of profligacy.

Meanwhile, Japan is in the verbal blast zone again, with Trump dusting off old gripes about rice and autos. India gets the carrot, for now—but carrots in Trump’s hand often turn to sticks.

Even the euro, riding the coattails of a softer dollar, can feel the unease. Sintra was more chorus than solo, with ECB officials mostly harmonizing around the idea that 1.20 is tolerable—just don’t get there too fast. Inflation data was a mixed bag, but the real story is that euro bulls are leaning hard on the dollar’s uncertainty, not their own fundamentals.

This is a market on edge—waiting, twitching, reacting in half-steps. The dojo lights are still dim. And until we know which chamber fires next week, no one’s willing to commit to the mat.

Rates traders have been coasting downhill, sledding on dovish momentum as the market prices in a measured easing cycle. But the glide path is getting choppy. The back end of the curve—once cruising—is now huffing against a headwind of fiscal and inflation risk.

The front end still holds firm, anchored by expectations for rate cuts into early 2026. Markets see the Fed tapping out around 3.00–3.25%, comfortably above neutral, suggesting a soft landing more than a panic dive. That stability at the short end is what’s holding the curve together—for now.

But out the curve, cracks are widening. The fiscal deficit is the elephant stomping around the Treasury market. Even if Secretary Bessent keeps long issuance on a leash, that doesn’t mean the beast is contained. Once the “Big, Beautiful Bill” gets signed and the debt ceiling is lifted, the Treasury’s cash coffers will need rapid refilling—likely through an avalanche of bills. That’s not just supply—it’s a drain. Reserves get pulled, liquidity tightens at the margins, and the weight begins to press on the long end.

Then comes inflation—lurking like dry tinder waiting for a spark. Tariff fallout could easily send CPI flirting with 4%. With 10-year SOFR still loitering around 3.70%, there’s a good 50bp of risk premium that could get repriced in a hurry. This isn’t a secular inflation surge—but it’s enough to snap traders out of their duration trance. The back end doesn’t have immunity; it has exposure.

So while there’s still a case for lower long-end yields into 2026, getting there isn’t going to be a Sunday stroll. It’s a trail through brushfire terrain—debt supply, political noise, tariff tremors, and a Fed that’s hearing footsteps from Pennsylvania Avenue. The steepener’s not fully in play, but it’s creeping. There's smoke in the brush, and for traders, that’s not a signal to run—it’s a reason to watch the wind.