19/08/2025 Market Watch
Tariff Expansion & Fed Speculation Shape Market Tone
Key Takeaways:
- US dollar softer against most G10 currencies, emerging markets mixed.
- European bond yields slightly lower, European equities continue higher.
- India-China relations improve, with Beijing easing export restrictions.
- US tariffs expanded to 400+ consumer items, S&P affirms US AA+ rating.
- Fed reverse repo usage decline raises chances of policy easing.
Capital markets began the week quietly, with the US dollar modestly softer against most major currencies. Dollar-bloc currencies underperformed, while other G10 peers gained around 0.1-0.2%. Emerging market currencies showed mixed performance, with central European units stronger, though the Russian ruble fell nearly 1%. European bond yields slipped, reflecting a cautious tone.
Indian equities outperformed on news of improved relations with China, partly linked to US foreign economic policy. Reports indicate Beijing is lifting export restrictions on rare earths and heavy industrial equipment to India, boosting sentiment. Meanwhile, European stocks advanced for a fifth time in six sessions, with the Stoxx 600 gaining about 0.5%. US equity futures were flat to slightly weaker, while gold and oil traded within recent ranges.
Geopolitical risk lingered, with limited market reaction to the Ukraine-Russia situation. Some analysts compared the standoff over Donbas to the Sudetenland in 1938, where concessions only paved the way for wider conflict. Trade developments added another layer of uncertainty as Washington extended steel and aluminum tariffs to cover more than 400 consumer goods. Despite this, S&P reaffirmed the US AA+ credit rating, citing tariff revenues as an offset to fiscal deterioration.
Finally, declining use of the Federal Reserve’s reverse repo facility increased speculation that the central bank may cut rates next month and potentially announce an exit from quantitative tightening. This suggests policy conditions could turn more supportive for risk assets in the near term.
United States of America
Overview
The Dollar Index continues to trade within a narrow band, largely contained by last Thursday’s range of 97.65–98.30. It briefly made a new high but remained capped below the 20-day moving average near 98.40 and the broader downtrend line at 98.55–98.60. Market focus is shifting to US economic releases and central bank signals.
Housing data remains weak, with July housing starts and permits expected to show further slippage. This continues a broader trend of housing softness, as starts have declined in two of three months each quarter since Q2 2024. The first half of the year showed an average monthly decline of nearly 1.9%, slightly worse than the 1.8% average decline seen in H1 2023.
Attention also turns to tomorrow’s release of the FOMC meeting minutes. While the market initially interpreted the meeting as hawkish, this contrasted with dovish dissent from two governors. Subsequent developments have reduced the minutes’ importance, particularly as futures markets now price in roughly 20 basis points of cuts for the September meeting, up from 10 basis points immediately after the meeting’s conclusion.
Economic Drivers
- Housing market weakness persists, with consistent declines in housing starts across quarters.
- Market expectations for Federal Reserve policy are shifting more dovish, with rate cut bets increasing.
- Dissent within the Fed highlights policy uncertainty, complicating the market’s initial hawkish reading.
Data and Events
- 19 August 2025: Building Permits
- 19 August 2025: Housing Starts
Price Action
- Dollar Index range-bound between 97.65–98.30.
- Resistance near 98.40 (20-day moving average) and 98.55–98.60 (downtrend line).
Key Points:
- Dollar Index remains trapped within a tight range below resistance levels.
- US housing data continues to show persistent weakness.
- FOMC minutes expected, but market focus has shifted to stronger dovish expectations.
- Rate cut bets for September have doubled since the last meeting.
Australia & New Zealand
Overview
The Australian dollar has shown volatility in recent weeks, rallying from $0.6420 on August 1 to nearly $0.6570 by last Thursday, before easing back below $0.6480. The $0.6475 level, which the currency continues to hold above, marks the 61.8% retracement of this month’s rally and serves as an important technical threshold. A sustained break below it could open the path toward $0.6450.
Traditionally seen as a proxy for Chinese economic performance, the Australian dollar has shown weaker correlation with China’s CSI 300 index recently. Over the past 30 sessions, the correlation has fallen below 0.15, the lowest in about six weeks, highlighting a divergence between the Australian currency and Chinese equity market movements. This detachment reflects shifting global risk dynamics and reduced sensitivity of the Aussie to Chinese equity trends.
Economic Drivers
- Australian dollar’s historic role as a proxy for Chinese economic performance is weakening.
- Correlation with China’s CSI 300 index has fallen to below 0.15 over 30 sessions, indicating minimal alignment.
- Market focus also influenced by broader G10 currency trends and commodity-linked sentiment.
- Regional attention on New Zealand, with the Reserve Bank of New Zealand expected to cut its cash rate to 3.0%, which may indirectly affect the Australian dollar.
Data and Events
- 19 August 2025: PPI (NZD)
- 19 August 2025: Consumer Sentiment
Price Action
- Australian dollar rallied from $0.6420 (01/08/2025) to $0.6570 (14/08/2025).
- Currently holding above $0.6475, which marks the 61.8% retracement of the monthly rally.
- A break below $0.6475 could target $0.6450.
- Yearly high recorded in early May slightly above $0.75.
Key Points:
- Australian dollar retraced after a sharp rally but remains above key support.
- Weakening correlation with Chinese equities signals shifting dynamics.
- No major domestic data due today, leaving market moves influenced by external drivers.
- RBNZ decision tomorrow may provide indirect regional impact.
Canada
Overview
The US dollar climbed to CAD1.3830 yesterday, its highest level since August 1, before easing to around CAD1.3800. By late European trading, it was back near CAD1.3820, showing resilience despite some pullback. The near-term targets for the pair stand at CAD1.3840, followed by the August 1 high near CAD1.3880.
The Canadian dollar’s initial weakness came despite positive domestic data. Housing starts rose for the fourth consecutive month, reaching an annualized pace of 294.1k units, the strongest reading since September 2022. Additionally, Canada saw foreign investors return as net buyers of domestic stocks and bonds in July for the first time since January, although inflows were modest at C$701 million.
Focus now turns to inflation data. July CPI is expected to rise 0.3%, which would pull the annual rate down slightly to 1.8% from 1.9% due to base effects. However, core inflation remains firm, with expectations of a 3.1% average compared to 3.05% in June. This persistence in underlying inflation pressures suggests the Bank of Canada is unlikely to shift policy at its upcoming meeting.
Economic Drivers
- US dollar strength weighed on the Canadian dollar despite supportive local data.
- Housing starts rose for the fourth straight month, reaching their strongest pace since September 2022.
- Foreign investors returned as net buyers of Canadian securities in July, though flows were modest.
- Inflation pressures remain firm, with core CPI expected to hold above 3%, likely keeping the Bank of Canada cautious.
Data and Events
- 19 August 2025: CPI
Price Action
- US dollar peaked at CAD1.3830, highest since 01/08/2025, before easing toward CAD1.3800.
- Support holding near CAD1.3800, with resistance levels at CAD1.3840 and CAD1.3880.
Key Points:
- Canadian dollar slipped despite strong housing and investment data.
- Housing starts hit highest level since September 2022.
- Inflation expected to ease slightly on headline but remain sticky in core measures.
- Bank of Canada likely to stay on hold given firm underlying inflation.
Europe
Overview
The euro reached a three-day high yesterday near $1.1715 before reversing lower to $1.1655 in North American trading. Losses extended further today toward $1.1640, just above key support around $1.1630, where the 20-day moving average and last Thursday’s low converge. The currency remains under pressure despite shifting trade and current account dynamics across the eurozone.
Trade performance has weakened notably. The eurozone’s seasonally adjusted trade surplus narrowed to 2.8 billion euros in June from 15.6 billion in May. However, the current account data released today painted a stronger picture, showing the surplus widened to 35.8 billion euros from 31.8 billion. Despite this improvement, the surplus as a share of GDP is expected to be smaller than last year’s 2.6%.
The eurozone’s external balances show significant strain from trade with major partners. On an unadjusted basis, the trade surplus with the US in June was less than half of the prior year’s figure, falling to 9.6 billion euros from 18.5 billion as exports declined 10.3% year-over-year while imports surged 16.4%. Trade with China also deteriorated, with exports down 12.7% and imports rising 16.7% year-over-year. These shifts highlight the pressures on the eurozone’s external sector despite strong current account balances.
Economic Drivers
- Eurozone’s trade surplus contracted sharply, reflecting weaker export performance.
- Current account surplus widened to 35.8 billion euros, though its share of GDP is expected to be smaller than last year’s 2.6%.
- Trade with the US deteriorated as exports fell over 10% and imports rose more than 16%.
- Exports to China declined 12.7% year-over-year while imports increased 16.7%, underscoring the eurozone’s external vulnerability.
Data and Events
- 19 August 2025: Current Account
Price Action
- Euro peaked near $1.1715 before retreating to $1.1655 yesterday.
- Extended losses to $1.1640 today, with support near $1.1630.
- Key technical levels include the 20-day moving average and prior lows around $1.1630.
Key Points:
- Euro weakened after failing to hold above $1.1715.
- Eurozone trade surplus narrowed significantly despite stronger current account figures.
- External trade with the US and China is weakening, reflecting declining exports and rising imports.
- Current account surplus remains positive but may shrink as a share of GDP this year.
United Kingdom
Overview
Sterling advanced to nearly $1.3600 last Thursday after stronger-than-expected Q2 GDP data but quickly reversed as selling pressure emerged, leaving it lower by the session’s close. The currency then slipped to a three-day low just above $1.35 yesterday, extending losses to slightly below $1.3490 today before finding some support. Market attention now turns to upcoming inflation data, which will influence expectations for Bank of England policy.
The UK will release July CPI tomorrow. Consensus points to a flat monthly reading, but due to base effects, the annual inflation rate is expected to rise slightly to 3.7% from 3.6%. Core and services inflation remain elevated, with the BOE projecting headline CPI could climb further to 3.8% in July and peak at 4.0% next month. Service price inflation is forecast to increase to 4.9% from 4.7%, underscoring the persistence of underlying price pressures.
Market positioning reflects reduced expectations for near-term easing. Swaps now price in about 13 basis points of cuts by year-end, implying roughly a 52% chance of a quarter-point reduction. This is a significant pullback from earlier this month when markets were fully pricing in a cut before the last BOE meeting.
Economic Drivers
- Stronger Q2 GDP supported sterling temporarily, though momentum faded.
- Inflation dynamics remain elevated, with headline CPI expected to rise slightly on base effects.
- BOE projections point to headline inflation peaking at 4.0% next month.
- Services inflation continues to rise, expected to reach 4.9%.
- Market expectations for BOE cuts have diminished compared to earlier this month.
Data and Events
No major economic releases are scheduled today.
Price Action
- Sterling peaked near $1.3600 after GDP release but reversed lower.
- Fell to a three-day low near $1.35, with further selling to $1.3490 today.
- Support seen at $1.3480, with downside risk toward $1.3420 (20-day moving average and 38.2% retracement).
Key Points:
- Sterling weakened after GDP-driven rally was met with strong selling.
- Inflation data in focus, with headline CPI expected to edge higher.
- BOE projects inflation to peak at 4.0% next month, with services inflation rising further.
- Market pricing reflects reduced expectations for BOE rate cuts this year.
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