26/08/2025 Market Watch
Political Uncertainty & Market Pullback Hit Sentiment
Key Takeaways:
- Dollar recovery slowed after Trump fired Fed Governor Cook.
- Euro, yen, sterling gained while emerging markets were mixed.
- Asian stocks mostly fell, European equities down 0.45%.
- European bond yields eased, French bonds lagging.
- US yield curve steepened to its widest in four months.
- Gold showing strength, oil retreating from four-day rally.
The dollar’s sharp rebound after last week’s Jackson Hole sell-off was disrupted as President Trump followed through on his threat to dismiss Federal Reserve Governor Cook. Cook intends to contest the decision, raising questions over presidential authority and potential institutional conflict. As North America opens, the greenback is trading narrowly mixed against G10 peers, with the euro, yen, and sterling leading gains. Emerging market currencies are showing a mixed performance, with the Taiwanese dollar among the weakest. The People’s Bank of China set the daily fix slightly higher following yesterday’s yearly low in the yuan.
Global equities have lost momentum after last week’s US rally. Most Asia-Pacific markets retreated, excluding Taiwan and Shenzhen, and Europe’s Stoxx 600 slipped 0.45%, its sharpest fall this month if sustained. US index futures are slightly weaker, reflecting softer risk appetite. In fixed income, European bond yields eased modestly after Monday’s jump, although French debt continues to underperform due to political uncertainty ahead of a confidence vote. In the UK, gilt yields rose nearly four basis points, catching up after the bank holiday.
US Treasury dynamics are also shifting, with the 2–10-year curve steepening to 58 basis points, the widest in four months. The Treasury is set to auction $69 billion in two-year notes and $85 billion in six-week bills, which could influence yield direction. Commodity markets remain volatile, with gold trading in an outside day pattern. A close above $3376 would be considered constructive for bulls. Oil prices, after four straight days of gains, are under pressure. October WTI has retreated from highs above $65 to trade near $63.70, just above yesterday’s support around $63.50.
United States of America
Overview
The Dollar Index staged a stronger rebound than expected after last week’s sharp sell-off, recovering above the 61.8% retracement level near 98.35. However, news that President Trump dismissed Federal Reserve Governor Cook briefly pulled the index back toward 98.10 before it regained momentum, edging past 98.55. The dispute is expected to intensify as Cook challenges the decision, raising institutional and political uncertainty.
Market attention today is on US economic data releases, although none are likely to significantly shift Federal Reserve expectations. Durable goods orders remain in focus, with forecasts pointing to a second consecutive monthly decline due to weaker Boeing orders. The broader trend in core orders is also soft, reflecting a slowdown in investment momentum. Housing data is expected to confirm a cooling property market, while digital trade tensions add another layer of uncertainty as the US considers retaliatory tariffs and export restrictions against nations imposing digital service taxes.
Economic Drivers
- Political tension after President Trump’s dismissal of Fed Governor Cook, with legal challenges expected.
- Durable goods orders under pressure from falling Boeing orders, pointing to weaker manufacturing activity.
- Core durable goods orders fell in Q2 for the first time since 2024, signaling slowing business investment.
- US housing market showing signs of cooling, with house price growth easing for four straight months.
- Rising trade tensions as the US threatens tariffs and export restrictions in response to digital service taxes.
Data and Events
- 26 August 2025: Durable Goods Orders
- 26 August 2025: CB Consumer Confidence
- 26 August 2025: Richmond Manufacturing Index
Price Action
- Dollar Index rebounded sharply after last week’s sell-off, reclaiming 98.55.
- Short-term volatility tied to political uncertainty following Cook’s dismissal.
- Market consolidation likely around the 98.10 to 98.55 range pending stronger data catalysts.
Key Points:
- Dollar Index recovered but remains vulnerable to political developments.
- Durable goods orders expected to decline again, highlighting manufacturing weakness.
- US housing data continues to signal cooling momentum.
- Trade risks persist as US targets digital service taxes.
- Richmond Fed President Barkin’s comments may provide additional policy context.
Australia & New Zealand
Overview
The Australian and New Zealand dollars were the only G10 currencies to extend their pre-weekend gains, although the advances were limited. The Australian dollar tested resistance around $0.6470, marking the 38.2% retracement level, and held firm. Minutes from the Reserve Bank of Australia’s most recent policy meeting, which saw a rate cut, offered little new insight. The bank remains on a gradual easing trajectory, though its forward guidance was restrained by uncertainty. Markets are pricing in less than a 30% chance of another cut at the next meeting, with November seen as the more likely window for further easing.
The New Zealand dollar briefly moved above its pre-weekend highs, reaching $0.5880 before retreating toward $0.5840 in the North American session. The decline aligned with retracement levels, with additional support near $0.5830, which also coincides with the 200-day moving average. Political commentary added weight to monetary policy expectations, as Prime Minister Luxon suggested that the Reserve Bank of New Zealand should have acted more aggressively by cutting 50 bp instead of 25 bp last week. The decision was split, with two dissenting votes favoring the larger cut. The cash rate target now stands at 3%, though the central bank had previously expected 2.50% by year-end. Markets anticipate that easing to 2.50% may extend into early next year, with two policy meetings still scheduled in 2025.
Economic Drivers
- Australian dollar supported by resilience after limited retracement and RBA minutes confirming gradual easing path.
- RBA uncertainty kept forward guidance restrained, with markets assigning less than 30% probability of a September cut.
- New Zealand monetary policy under scrutiny, with political pressure for a deeper cut after last week’s 25 bp move.
- RBNZ decision split 4-2, reflecting internal debate on the pace of easing.
- Markets expect about 38 bp of easing priced in across the two remaining meetings of the year.
Data and Events
- 26 August 2025: Monetary Policy Meeting Minutes
Price Action
- Australian dollar held support near $0.6470, aligned with the 38.2% retracement.
- New Zealand dollar tested resistance near $0.5880 before retreating toward $0.5840.
- Technical support for NZD found near $0.5830, coinciding with the 200-day moving average.
Key Points:
- Australian dollar firmed at key retracement level despite limited RBA guidance.
- Market sees higher likelihood of RBA easing in November, not September.
- New Zealand dollar pulled back after testing fresh highs.
- RBNZ easing path debated, with political calls for larger cuts.
- Markets pricing 38 bp of RBNZ easing over the next two meetings.
Japan
Overview
The yen’s direction continues to be shaped primarily by US interest rates. After falling late last week on dovish remarks from Federal Reserve Chair Powell, US yields rebounded modestly on Monday, supporting a dollar bounce toward JPY148.00. The pair held near this level in early Tuesday trading, with immediate support established around JPY147.00 and consolidation above JPY147.50 in the European session. A sustained break above JPY148.00 could open the way back to recent highs near JPY148.80.
Bank of Japan Governor Ueda avoided direct policy signals during his Jackson Hole remarks but highlighted ongoing labor market tightness and wage growth spreading from large corporations to smaller firms. This reinforced expectations that the BOJ may raise rates again, potentially as early as October. Still, swaps pricing has not shifted significantly, with only 13-14 bp of tightening implied. On the data side, July producer service price growth slowed to 2.9% from 3.2% in June, undershooting forecasts. More focus will be on Tokyo’s August CPI, due later this week, with expectations for a third straight month of moderation in both headline and core inflation.
Economic Drivers
- Yen guided by US interest rate movements, with dollar strength tied to yield fluctuations.
- BOJ Governor Ueda noted broadening wage growth pressures, signaling potential support for future tightening.
- Market pricing implies limited probability of an October hike, with 13-14 bp of tightening expected.
- Producer service prices eased to 2.9% in July, showing slower inflation momentum.
- Tokyo CPI for August anticipated to show continued moderation, key for inflation outlook.
Data and Events
- 26 August 2025: BOJ Core CPI
Price Action
- Dollar tested resistance near JPY148.00, with a potential move toward JPY148.80 on a breakout.
- Support identified near JPY147.00, with the market holding above JPY147.50.
- US yield movements remain the main driver for USD/JPY direction.
Key Points:
- Yen remains highly sensitive to US interest rate shifts.
- Dollar consolidating between JPY147.00 and JPY148.00, with upside risk if resistance breaks.
- BOJ watching wage dynamics closely as evidence of inflation persistence.
- Market pricing for an October BOJ hike remains limited.
- Tokyo CPI this week is the key domestic inflation gauge.
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