The dollar is holding steady amid holiday-thinned trading conditions as investors process a raft of central bank policy announcements and brace for a spike in geopolitical tensions in the hours or days ahead. Treasury yields are down, equity futures are soft, and safe-haven currencies are outperforming their risk-sensitive counterparts after reports circulated suggesting that the US will join Israeli bombardment of Iran in the coming days and President Donald Trump said “I may do it. I may not do it. I mean, nobody knows what I’m going to do”. An escalation in the war is seen raising the risk of disruption to global oil markets, although much hinges on the targets selected.
The pound is holding steady even after the Bank of England telegraphed a possible late-summer rate cut, slightly reducing the currency’s yield advantage relative to the euro and dollar. In a closely-watched decision, six of nine members of the Monetary Policy Committee opted to leave rates unchanged, with Deputy Governor Dave Ramsden joining Swati Dhingra and Alan Taylor in voting for a cut. Markets had expected a 7-to-2 margin to prevail. In the statement laying out the decision, policymakers noted a “significant slowing” in real-economy wage increases with the economy generating “near-zero employment growth,” while highlighting a worsening in measures of underlying gross domestic product. A rate cut by September is fully priced in, and odds on an August move are holding around the 75-percent mark.
The decision came on the heels of a rate cut from the Swiss National Bank, which lowered its policy rate to zero in response to declining inflation, persistent upward pressure on the franc, and mounting economic uncertainty triggered by US tariff measures. Annual consumer price growth fell below the central bank’s target range in May — turning negative for the first time in four years — while the franc, buoyed by safe-haven demand, has gained nearly 11 percent against the dollar since January. With the export sector straining under intensifying trade headwinds, the move appears calibrated to ease currency pressures without resorting to direct intervention, which could provoke a response from US officials. It may also foreshadow a return to negative rates should conditions deteriorate further.
Market reaction to yesterday’s Federal Reserve decision was extremely muted. The Federal Open Market Committee left rates unchanged for a fourth consecutive meeting and all of its economic projections were adjusted in an unfavourable direction, with growth expectations revised down, while inflation and unemployment forecasts moved higher. The Committee stopped short of adjusting its forecast showing two rate cuts in the latter half of the year however, even as the number of participants who expect to leave rates unchanged for the remainder of 2025 increased to seven out of 19, up from four when the last projections were published in March. The gap between the median “dot plot” Fed Funds rate estimate and swap-implied market expectations for the end of the year tightened further, suggesting that policymakers and investors are broadly aligned in their views on the US economy.
Speaking during the press conference following the decision, Jerome Powell repeatedly pointed to trade policy-related uncertainties, suggesting that any tension between the central bank’s inflation and unemployment mandates could take time to identify and resolve. “We haven’t been through a situation like this and think we have to be humble about our ability to forecast it,” he said, noting that the economy is in “solid shape,” and observing that the “labour market is not crying out for a rate cut,” before warning that every well-resourced professional observer is “forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs”.
In our view, the negative hit to business investment and consumer demand will ultimately outweigh any risk of a rebound in inflationary pressures in determining the Fed’s policy trajectory — and nascent signs of softness may already be emerging in the jobs market — but for now at least, the aggregate sum of hard data is still supportive of a more optimistic view on the economy’s momentum.
Data published yesterday suggested that a widely-feared foreign investor retreat from US Treasury markets did not occur in April, despite considerable speculation to the contrary. An update from the Treasury department showed international holdings falling by $36.1 billion in the month after increasing by $491.1 billion in the first quarter, suggesting that trading by domestic participants generated much of the turmoil in long-term rates that sent shockwaves through global markets. China’s disclosed holdings changed only modestly, and funds parked in offshore intermediaries known to shield some of Beijing’s moves from view — like Belgium, Switzerland, Luxembourg, and the Cayman Islands — remained stable, suggesting that the country did not attempt to use its portfolio as a weapon against US tariff threats during the period in question.
