When politics hijack the tape: Washington and Paris throw FX into turbulence

The market thought it had a clean script: Powell at Jackson Hole loosens the wings, rate cuts slip into September, and traders glide into autumn with the wind at their back. But as ever, the tape had other ideas. No sooner had risk assets unclenched than politics barged through the saloon doors—Washington on one side, Paris on the other—spilling the whiskey and kicking over the poker table.

Trump’s sacking of Lisa Cook wasn’t a bureaucratic reshuffle, it was a street fight. Traders have lived through presidents jawboning the Fed before, but this is different: a sitting president muscling governors off the board, stacking the deck, and daring the courts to stop him. For markets, the question isn’t just whether Powell cuts in September—it’s whether the Fed itself still sits above the fray or has been dragged into the mud like any other partisan trench. When independence becomes negotiable, curves don’t steepen on optimism, they fracture on doubt. What should have been a gentle reflation steepener now feels like a stress test of credibility.

The Treasury auctions ahead loom like a stress fracture waiting for weight. Seven-year paper is hardly the star attraction of the bond market, but when buyers question the referee, even the small matches spark. If demand stumbles, it won’t just be a yield curve story—it’s an equity story, a liquidity story, a trust story. Global risk has feasted on cheap dollar liquidity all summer; if the bond market starts to choke, that feast ends abruptly.

And so, safe-haven flows begin to stir. The dollar’s immediate wobble on the Cook news felt like the old script—Trump undermines the Fed, dollar slides. But reflexes are rarely clean in markets. When confidence in the system erodes, players don’t sprint to euros; they retreat to the old sentinels, the yen and the franc—quiet defenders that don’t need speeches or headlines to justify their role.

Meanwhile, Europe brings its own theater. Bayrou’s confidence vote in Paris reads like an act of fiscal virtue, but in practice it’s political roulette. The opposition blocs don’t need to agree on policy to unite on ousting him, and the math tilts against the prime minister. French OATs, already the weak link this summer, risk tumbling down the hierarchy of European sovereigns. When France begins to trade like Italy, the euro’s pretensions of safe-haven status unravel fast.

And here’s the rub: positioning is already stretched. Asset managers and leveraged funds are camped out in euro longs, fat and happy on Powell’s dovish glow. Crowded trades don’t need a hurricane to flip—they need only a French squall. That’s why the euro’s greatest threat may not be Bayrou’s defeat itself, but the cascade of position squaring that follows. The crowded theatre doesn’t need flames—just the shout of “fire.”

In calmer times, the week’s U.S. data—consumer confidence, GDP revisions, PCE inflation—would set the rhythm. Now they’re garnish, side notes in a play dominated by political fire. Even Waller’s speech, important in its own right, risks becoming background noise to a market fixated on who really runs the Fed and whether France’s government still stands by month’s end.

This is how August ends: not with the low-volatility lull of carry trades, but with the sound of glass breaking and chairs scraping across the floor. The dollar’s path isn’t simply Powell’s to dictate anymore; it’s entangled in Trump’s courtroom drama and Paris’s parliamentary roulette. Markets, once lulled to sleep, are waking into the reality that politics is volatility, and that volatility doesn’t ask permission to return.