Dollar rally pauses as Fed signals patience once again 

US assets adjust to Fed meeting’s message

Both the US dollar and US equity indices are trying to find their footing after the critical FOMC meeting. As widely expected, the Fed kept rates unchanged, but Chair Powell was slightly more hawkish than investors anticipated. The majority of FOMC members continue to feel comfortable with the current level of rates – even though Powell described current policy as “modestly restrictive” - as the US jobs market is near maximum employment and inflation is above target.

Despite questions from journalists about the recent trade agreements easing uncertainty and tariffs potentially having a lower impact on inflation, Powell et al. support their ‘wait-and-see’ approach, wishing to evaluate if some early indications of price hikes due to tariffs will have a broader follow-through. Notably, rate cuts remain on the table as Powell did not exclude such a policy move. However, he highlighted the FOMC’s willingness to act in a timely and efficient way to avoid damaging the labour market with unnecessary rate changes.

FOMC members Waller and Bowman stuck to their pre-meeting rhetoric, as both voted for a 25bps rate cut. This was the first time since 2000 that a rate decision under Powell was not unanimous, and the first meeting since 1993 with more than one dissenter. These two doves will continue to push for a rate cut, but for their proposal to gain traction, incoming data has to materially deteriorate, starting with today’s PCE report and, more importantly, Friday’s nonfarm payrolls figure. Notably, following the stronger preliminary GDP report for Q2, which showed tamer inflationary pressures, the June CPE report and jobless claims could prove more market-moving than usual.

Equities recover after tech earnings 

The lack of a dovish tilt or a hint that a rate cut could be on the way in September dented market appetite, with US equity indices trading at session lows after the Fed meeting. However, potent earnings results from Meta and Microsoft – with both firms managing to beat EPS and revenue forecasts - lifted spirits in equity markets. Notably, the schedule remains packed, as Apple and Amazon are scheduled to release their Q2 earnings today. Investors will focus on Apple’s China sales, Amazon’s retail business competition amidst tariffs, and what both firms’ AI investments are.

More trade deals; but not for Canada, India and Brazil 

Investors also have to contemplate the August 1 reciprocal tariff deadline, as more countries are accepting US President Trump’s demands. Matching the EU and Japan deals, South Korea has agreed to invest $300bn and purchase $100bn of US energy products in exchange for a 15% tariff.

But not everything is rosy in the trade world. With the US-Canada deal remaining elusive despite months of deliberations, both Brazil and India are feeling the wrath of the US President. Following the punitive 50% tariff imposed on Brazilian exports to the US – although some critical sectors such as aircraft and energy have been excluded – Indian exports will face a 25% tariff plus an unspecified penalty for India’s decisions to continue buying Russian oil and military equipment.

Commodity space rattled

At the time of writing, gold is trying to stabilize at the $3,300 area, after dropping to a new one-month low of $3,268 following the FOMC decision, and WTI oil is hovering below $70. But the most impressive move took place in copper. Despite Trump’s decision to impose a 50% tariff on copper products, refined copper was excluded, causing a 19% drop in copper future and unwinding a significant part of copper’s 2025 gains.

Yen gets a small boost from the BoJ

Despite the Bank of Japan keeping rates unchanged and highlighting the high uncertainty surrounding trade developments, the upward revisions to both headline and core CPI projections and the BoJ’s muted optimism about the growth outlook are somewhat boosting the yen. Dollar/yen is retreating after testing the key 200-day simple moving average for the first time since mid-February.