29/08/2025 Market Watch

Choppy Trading Dominates as Fed Debate

Key Takeaways:

  • US dollar trades slightly firmer in narrow ranges ahead of North American holiday weekend.
  • Fed divisions intensify with criminal referral against Governor Cook and Waller pushing for September cut.
  • Chinese yuan strengthens, up nearly 0.5% against dollar this week.
  • European equities under pressure, Stoxx 600 down nearly 2% on the week.
  • Gold holds above $3400, oil consolidates above $64.

The US dollar is showing a modestly stronger tone as markets enter the long holiday weekend in North America. Trading ranges remain tight, but the Federal Reserve is once again in the spotlight. A new criminal referral against Governor Cook has heightened political drama, while Governor Waller reiterated his support for a September rate cut. He highlighted signs of labor market weakness and urged looking past tariff-driven price pressures, underscoring widening divisions within the Fed.

In Asia, most large equity markets declined, but Hong Kong and mainland Chinese indices outperformed, with the CSI 300 advancing 2.7% this week, one of the strongest performances among major markets. The Chinese yuan continued to gain ground, rising nearly 0.5% against the dollar, making it the second-best performing emerging market currency this week after the Thai baht. Meanwhile, China lowered the dollar’s reference rate to a new low for the year, reinforcing the yuan’s upward momentum.

European markets are struggling. The Stoxx 600 is set to close its fourth consecutive daily decline, down nearly 2% for the week, with bonds also under pressure. Yields are 2 to 3 basis points higher across the region, trimming earlier declines. In the US, 10-year Treasury yields edged slightly higher above 4.22%, though they remain down about five basis points on the week.

Commodities are holding firm. Gold reached a monthly high above $3423 before easing but remains above $3400, posting about a 1% weekly gain. Oil markets are steady, with October WTI hovering just above $64, up around 0.75% for the week.

United States of America

Overview

The Dollar Index has been consolidating within a narrow range after last week’s volatility following Fed Chair Powell’s Jackson Hole speech. Despite expectations that the index would trend lower, it has instead oscillated between 97.55 and 98.84, with today’s action confined to just above 97.80. The currency faces pressure from several fronts: the risk of another weak jobs report, sharp downward revisions expected in the establishment survey, and ongoing concerns around the Federal Reserve’s independence. These factors are weighing on investor sentiment and increasing the risk premium required to hold the dollar.

On the rates side, the US two-year premium over Germany remains close to lows seen earlier in the year, while the US 10-year yield sits near the lower end of a five-month range. Against Japan, the US 10-year premium is at its weakest in three years, underscoring diminishing relative yield support for the greenback. Macroeconomic releases will provide important direction. July’s personal income and consumption data are likely to indicate a firm start to Q3, supported by the Atlanta Fed’s GDP tracker projecting 2.2% growth. This pace is still above what the Fed considers the non-inflationary trend, countering arguments of stagflation. Meanwhile, trade figures are expected to show deterioration in the advanced goods balance for July.

Attention is also on inflation. The personal consumption deflators will be in focus, though market expectations are already shaped by earlier CPI and PPI data. Looking ahead, the September 11 CPI report is forecast to show headline inflation rising to 2.9% from 2.7%, while the core remains steady at 3.1%. On the policy side, Governor Waller reaffirmed his call for a September rate cut, citing labor market risks and advocating for overlooking tariff-driven price pressures.

Economic Drivers

  • Risk of another weak US jobs report weighing on dollar sentiment.
  • Expected sharp downward revisions in establishment survey adding pressure.
  • Concerns over Fed independence undermining confidence in US policy credibility.
  • Narrowing US-German and US-Japan yield spreads reducing relative support for dollar.
  • Atlanta Fed GDP tracker projects 2.2% Q3 growth, above non-inflationary trend.
  • Ongoing focus on inflation dynamics with CPI expected to rise to 2.9% headline and 3.1% core.
  • Fed officials, including Governor Waller, signaling support for a September rate cut.

Data and Events

  1. 29 August 2025: FOMC Member Speaks
  2. 29 August 2025: Core PCE Price Index

Price Action

  • Dollar Index consolidating between 97.55 and 98.84.
  • Current trade confined to a narrow 25-tick band above 97.80.
  • Yield spreads with Germany and Japan at multi-year lows, limiting dollar support.

Key Points:

  • Dollar under pressure from weak labor data outlook and Fed credibility concerns.
  • Yield advantage versus Germany and Japan at multi-year lows.
  • July data to confirm a firm start to Q3, with GDP growth tracking at 2.2%.
  • Inflation outlook points to slightly higher headline CPI in September.
  • Governor Waller backing a September rate cut despite tariff-related inflation risks.

Canada

Overview

The Canadian dollar initially weakened after the release of a record quarterly current account deficit but avoided a deeper sell-off as it found support. The US dollar slipped to a session low near CAD1.3740 during North American trading before settling lower for the third consecutive session. Around CAD1.3750, the pair has reached the midpoint of the rally that began from the July 23 low near CAD1.3575 to last Friday’s high around CAD1.3925. Price action indicates that short-term averages are close to crossing for the first time since late July, signaling potential shifts in market momentum.

On the domestic front, Canada’s economy contracted in both April and May, raising concerns over Q2 performance. While the economy grew at a 2.2% annualized rate in Q1, Q2 is widely expected to show contraction. However, economists believe the downturn has bottomed out, with expectations pointing to a gradual recovery in the second half of the year. Consensus forecasts anticipate a modest 0.1% expansion in Q3, followed by stronger growth of 0.8% in Q4.

Economic Drivers

  • Record quarterly current account deficit weighing on the Canadian dollar.
  • Weak monthly GDP data for April and May indicating Q2 contraction.
  • Canadian economy grew 2.2% annualized in Q1 but expected to contract in Q2.
  • Economists forecast gradual recovery with 0.1% Q3 growth and 0.8% Q4 growth.

Data and Events

  1. 29 August 2025: GDP

Price Action

  • US dollar fell to session low near CAD1.3740 before rebounding.
  • Pair consolidating near CAD1.3750, the midpoint of the recent rally.
  • Short-term moving averages on track to cross for the first time since late July.
  • Key downside target at CAD1.3700-20 if support breaks.

Key Points:

  • Canadian dollar pressured by record current account deficit but avoided deeper losses.
  • US dollar has settled lower for three consecutive sessions.
  • Economy likely contracted in Q2 after strong Q1 growth.
  • Recovery outlook remains modest with growth projected to resume in Q3 and Q4.
  • Technical levels point to CAD1.3700-20 as the next key support zone.

Europe

Overview

The euro rebounded strongly after touching a three-week low near $1.1575 on Wednesday, climbing to almost $1.17 yesterday. The move took the currency above the 61.8% retracement of this week’s decline, found around $1.1680. Today, the euro is trading steadily within a narrow $1.1655–$1.1690 band. Despite the recovery, the broader trend has been marked by choppy trading, with alternating daily gains and losses since last Tuesday. Last Friday’s high stood close to $1.1745, setting a short-term resistance marker.

On the data front, France and Spain released their August inflation figures, offering an early look ahead of the eurozone’s preliminary CPI next Tuesday. French inflation rose 0.5% in August, leaving the annual rate at 0.8%, slightly lower than July’s 0.9%. Spain’s inflation was unchanged on the month, holding steady at 2.7% year-over-year. These figures highlight the difficulty in maintaining momentum given the weaker price dynamics in the second half of last year, when eurozone CPI rose at an annualized pace of just 0.8%. By contrast, inflation was much stronger earlier, with 4% annualized growth in the first half of 2024 and 3% in the first half of 2025.

Policy expectations are shifting accordingly. The swaps market is pricing a 38% probability of another rate cut this year, significantly down from nearly 70% odds at the start of August. This reflects skepticism that the European Central Bank will act further, given uneven inflation trends and the potential for base effects to stabilize price measures.

Economic Drivers

  • Euro supported by recovery from three-week lows, though trading remains volatile.
  • French August inflation rose 0.5% month-on-month, annual rate eased to 0.8%.
  • Spanish August inflation flat month-on-month, annual rate steady at 2.7%.
  • Eurozone CPI comparisons challenged by weak base in H2 2024 (0.8% annualized).
  • Stronger inflation pace in H1 2024 (4% annualized) and H1 2025 (3% annualized) influencing outlook.
  • Swaps market assigns 38% chance of another ECB rate cut this year, down from nearly 70% earlier in August.

Data and Events

  1. 29 August 2025: German Retail Sales
  2. 29 August 2025: German Prelim CPI
  3. 29 August 2025: German Unemployment Change

Price Action

  • Euro recovered from $1.1575 to near $1.17, surpassing 61.8% retracement of weekly decline at $1.1680.
  • Current consolidation within $1.1655–$1.1690 range.
  • Last Friday’s high near $1.1745 remains a resistance marker.
  • Choppy trading with alternating daily gains and losses since last Tuesday.

Key Points:

  • Euro rebounded strongly from three-week lows but remains in volatile trading.
  • French inflation eased to 0.8% while Spain’s held steady at 2.7%.
  • Base effects from weak 2024 CPI complicate comparisons.
  • ECB rate cut expectations reduced, with only a 38% chance priced in.
  • Resistance remains near $1.1745 as euro consolidates gains.

Japan

Overview

The dollar held above Monday’s low but still closed at its weakest level since late July. After Fed Chair Powell’s Jackson Hole speech last week, the greenback dipped slightly below JPY146.60 and came close to retesting that level yesterday. It is currently trading in a narrow band between JPY146.75 and JPY147.20. Price action has been volatile, with alternating daily gains and losses since early last week, mirroring the choppy performance seen against the euro. A decisive break lower could open the door to the JPY145.85–JPY146.20 zone.

Domestic data releases painted a mixed picture of Japan’s economy. July retail sales dropped sharply by 1.6%, well below expectations for a modest 0.2% decline and reversing June’s 0.9% rise. Industrial output also fell 1.6%, against forecasts for a smaller 1.1% decline, after strong growth in June. On the positive side, the unemployment rate eased to 2.3% from 2.5%, marking the lowest level since 2019. Inflation pressures in Tokyo moderated for the third straight month, with August CPI slowing to 2.6% from 2.9%, the lowest since last November. The core rate, excluding fresh food, eased to 2.5% from 2.9%, while the measure that also strips out energy softened to 3.0% from 3.1%. Rising fresh food prices continue to influence processed food categories.

Policy expectations remain steady, with the swaps market pricing around 17 basis points of tightening before year-end. These expectations have shown little change over the past week or month, reflecting caution in adjusting monetary outlooks given mixed economic data.

Economic Drivers

  • Dollar-yen pair under pressure following Fed-driven volatility and choppy global trading.
  • Weak Japanese retail sales, falling 1.6% in July versus expectations of -0.2%.
  • Industrial output down 1.6% in July after June’s strong gain.
  • Unemployment rate fell to 2.3%, the lowest since 2019.
  • Tokyo CPI slowed for third month, headline 2.6%, core 2.5%, excluding food and energy 3.0%.
  • Swaps market pricing about 17 bp of tightening by year-end, steady over recent weeks.

Data and Events

  1. 29 August 2025: Tokyo Core CPI
  2. 29 August 2025: Unemployment Rate
  3. 29 August 2025: Retail Sales
  4. 29 August 2025: Consumer Confidence
  5. 29 August 2025: Housing Starts

Price Action

  • Dollar closed at weakest level since late July.
  • Trading within JPY146.75–JPY147.20 range.
  • Key support seen near JPY146.60, with downside target at JPY145.85–JPY146.20.
  • Choppy trading with alternating gains and losses since early last week.

Key Points:

  • Dollar held above recent lows but remains vulnerable against the yen.
  • Japanese retail sales and industrial output fell more than expected.
  • Unemployment dropped to 2.3%, the lowest since 2019.
  • Tokyo CPI moderated further, signaling easing inflation.
  • Market pricing for BOJ tightening remains stable at about 17 bp for 2025.

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