Market Brief: Currency Markets Steady As Traders Await Fed Communications

It’s quiet. Too quiet. Most major currency pairs remain trapped in tight price ranges this morning as volumes fall, but the dollar is firming slightly as traders hedge themselves against an unexpectedly-hawkish message from Jerome Powell at Friday’s meeting in Jackson Hole, and Treasury yields are pushing modestly higher. Although technology stocks are paring their losses after yesterday’s swoon, broader equity indices look set to print slightly lower at the open.

The British pound is almost unchanged even after inflation climbed to an 18-month high, topping market forecasts and seemingly complicating the Bank of England’s easing plans. According to an update from the Office for National Statistics this morning, headline consumer price growth hit 3.8 percent in the year to July, up from 3.6 percent previously and beating the street’s expectation for a 3.7-percent print, while landing in line with the Bank’s August forecast. Services inflation—closely monitored by monetary policymakers as a measure of underlying price pressures—jumped to 5.0 percent from 4.7 percent, but this was mainly driven by a sharp rise in highly-volatile airfare costs, leaving market expectations for an early-2026 rate cut largely intact.

The Canadian dollar is trading with a defensive bias after yesterday’s inflation report showed headline price pressures easing, even as the Bank of Canada’s preferred measures of underlying price pressures remained too hot for comfort. Traders are assigning one-in-three odds to a rate cut at the central bank’s September meeting, up slightly from Monday’s levels, and have a move fully priced in for January, ahead of the previously-anticipated April. We think data disappointments in early September could force these odds to rise further—and expect downward momentum in the Canadian dollar to intensify slightly—but still expect weakness in the US to take some of the selling pressure off the currency by year end.

Minutes taken during the Federal Reserve’s July meeting—due for release this afternoon—should help shed light on one of the most hotly-contested rate decisions in recent memory. Two officials—Michelle Bowman and Christopher Waller—dissented in favour of cutting rates, marking the first time two governors voted against the majority since 1993, and providing early evidence of a shift in how policymakers are viewing the balance of risks facing the American economy. The June meeting minutes showed “some” officials seeing tariff-led price pressures posing a greater threat to the central bank’s dual mandate, while a “few” were more worried about downside risks to the labour market, and investors will parse today’s edition for signs that the doves were multiplying ahead of July’s disappointing non-farm payrolls report—which triggered a violent repricing in easing odds.

Purchasing manager indices representing most major economies will begin landing tonight and will continue into tomorrow’s session, delivering insight into how conditions are evolving as the effects of Donald Trump’s trade war ripple across the global landscape. Economies outside the US could show signs of growing strain as the first half’s tariff front-running efforts give way to weaker export demand, but anecdotal reports from our industrial contacts would suggest that “bullwhip” effects are still playing out, with supply chains remaining in a state of extreme disruption. In the euro area, it isn’t clear how activity levels are changing—industrial production excluding construction fell by 1.3 percent between May and June as pharmaceutical shipments were curbed, but the ex-Ireland number fell by just 0.1 percent over the same time frame—and the jury is still out on whether US demand will fall, and how that might impact wider global output patterns. US household consumption remains incredibly important to global trade flows, but also isn’t the only engine powering the world economy.

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