Dollar Regains Ground

MACRO FRAME

With another hold on policy, markets look to domestic data in the US, while the geopolitical factors continue to support a hawkish macro backdrop.

STOCK INDEX FUTURES

Equity index futures moved higher overnight, with the Nasdaq leading gains as the tech rally finds its legs amid the earnings backdrop. However, the AI trade is fragmenting, with the market rewarding clear-cash-flow linkages to AI capex and penalizing heavy spenders. Amazon is up around 12–13% on a strong quarter, lifting the broader tech tape; Microsoft is up roughly 15%, as Azure and Copilot beats reassured investors that its AI spend is translating into revenue and backlog. On the other hand Apple is down about 7% after warning on supply constraints and signaling an iPhone price hike, while Meta is down about 8% as its AI capex crushed free cash flow without a fully convincing monetization plan. Sentiment in the tech space is bullish today, South Korea’s KOSPI index surged about 18% today, extending Thursday’s momentum and acting as a regional amplifier of the tech rebound.

Although most Magnificent Seven earnings are now behind us, the sharply divergent reactions offer a useful guidepost for how investors are likely to assess the broader technology sector, particularly their willingness to reward strong results or punish signs of weakening growth. Sentiment over AI infrastructure and spend continues to play a dominate role in price direction ahead of upcoming inflation and labor data, which will likely be the next catalyst for large moves in the indexes.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index rebounded overnight, recovering above the 100 level after yesterday’s selloff approached oversold territory. It is up 0.48% to 100.35. The market has reconsidered its post-FOMC rate hike doubts modestly, with Fed-tightening expectations rebounding as September’s meeting is now priced at a 69% chance of a hike compared to 30% odds following Warsh’s press conference. Regardless, the dollar has lost some support in interest-rate differentials, which have been a dominant driver of dollar direction in recent months. The market has now repriced a December rate hike, reflective of DXY’s move above the 100 level, which is the biggest indicator of market expectations that the Fed will hike rates this year. That dynamic will leave DXY vulnerable to the divergence in policy expectations between Fed and ECB.

Watch point: While markets are not expecting any change in policy from the Fed, a hawkish outcome should not be discounted. Meanwhile, underlying fundamentals remain supportive of the dollar.

EURO: The euro is 0.35% lower at $1.1487. Eurozone inflation figures for July largely matched expectations, though core CPI rose 2.5% YoY, above the 2.4% YoY expected pace. Headline inflation rose to 2.9% YoY, mainly thanks to higher energy prices, though underlying price pressures remain firm with services prices rising alongside non-energy industrial goods. Stronger-than-expected economic data in recent days has reinforced market expectations that the European Central Bank will raise rates once more this year. Money markets have moved expectations of tightening modestly forwards and are pricing a near 71% chance of a hike in September, while remaining fully priced in for a move higher in October.

ECB and Fed policy expectations will continue to play an outsized role in EUR price direction. The drop in Fed tightening expectations has narrowed the spread between ECB and Fed, proving favorable to EUR. With no improvement in tanker flows through the Strait, and even in the event of a peace deal between the US and Iran, the market will likely continue to price in risk premium, keeping European bond yields and policy tightening expectations elevated.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations.

BRITISH POUND: Sterling is 0.31% lower to $1.3472, though it is set for a monthly gain against the dollar. A more stable political picture in the UK has helped support the pound, while a drop in Fed tightening expectations has benefited the interest rate-differential landscape in the favor of the UK. The Bank of England is now in a waiting period to assess the extent to which inflation will rise as a result of the US-Iran war and renewed rise in energy prices. The BoE’s 6-3 vote to hold rate steady was a more hawkish outcome than market expectations of a 7-2 vote. Catherine Mann, Megan Greene, and Chief Economist Huw Pill, among the more hawkish on the board, voted for a rise in the Bank Rate to 4%. Governor Bailey noted that holding the Bank Rate steady was appropriate given uncertain global conditions, while domestic conditions have turned more benign. Largely, the BoE is not seeing enough on the data front to abandon its wait-and-see approach. Money markets have pushed back the timing of a fully priced rate-hike to December in response.

JAPANESE YEN: The yen is 0.51% lower at 160.33 yen per dollar. The Bank of Japan kept rates steady at 1% as expected, but for the first time warned that underlying inflation could exceed its 2% target and said future policy discussions will focus on upside price risks. Ueda explicitly flagged the September meeting and warned that delaying necessary action could allow an overshoot and “hurt the economy.” In the quarterly outlook, the BoJ went from saying underlying inflation was “approaching” 2% (April) to saying underlying inflation could move above 2%, its strongest overshoot warning to date. Board member Takata dissented, calling for a hike, reinforcing that hawks are pushing for a faster path. A September–October hike is now firmly in the cards. Money market pricing has shifted forward, though still not fully pricing a hike until December, while only pricing a 29% chance of a September hike. Verbal efforts to support the yen have had little effect on the currency, despite Thursday’s official intervention offering some relief as traders remain reluctant that the BoJ will commit to raising rates before December. Therefore, BoJ rate hike expectations will continue to be the dominant driver in yen direction, outside of the geopolitical bid. Prime

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.19% weaker at $0.7012. Second-quarter inflation in Australia came in below forecasts, with the key trimmed mean measure of core inflation up 0.8% QoQ, below forecasts for 0.9%. The annual pace landed at 3.6% YoY, up from 3.5%, but below the RBA’s forecast of 3.8%. The downside surprise relative to expectations has shifted the policy bias towards a RBA hold for the remainder of the year. Markets are now see just a 3% chance of a hike next month, down from 21% earlier, and are pricing the chance of year-end hike at 48%. Still, on Tuesday, RBA Governor Michele Bullock said underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices, though emphasized that the rate outlook remains uncertain as it was not yet clear whether the three rate hikes already delivered would be sufficient.

TREASURY FUTURES

Yields are higher across the curve in a modestly flattening move, though the 2/10 and 2/30 spreads has retreated from yesterday’s two-month highs. The recent steepening of the curve reflets market doubts over the Fed’s ability to tackle inflation. Thursday’s data showed modest real consumption growth with a very soft monthly inflation pulse. Despite the “benign” headline figures in Thursday’s inflation and GDP data, consumer spending rose 3.2% in Q2, up from 0.5% in Q1. Furthermore, sales to private domestic purchasers, a key measure of underlying demand rose 3.9% in Q2 buoyed by tax cuts and strong demand.

While the 9-3 vote was less divided than we expected, we still expect a hike in September. Divided FOMC votes are rare, only about 31 meetings since 2002 produced a formal dissent of any size. Historically, single-dissent meetings dominate, while meetings with 2 or 3+ dissents are genuinely uncommon, making 2025-2026 an unusual stretch of Committee discord. Grouping these 31 usable episodes by the number of dissenters reveals a nonlinear relationship between dissent size and how likely policy is to shift at the very next meeting. Across all 31 tracked episodes, policy changed at the following meeting roughly 42% of the time, meaning a divided vote is a weak standalone predictor of an imminent shift. Two-dissent meetings show the clearest tendency toward near-term change (70% policy change rate at the following meeting), notably higher than either single-dissent (27.8%) or 3+-dissent meetings (33.3%, though with only 3 data points, this bucket is statistically thin).

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term.

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