Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

I'm excited to announce that I'm now part of Reuters Open Interest (ROI), an essential new source for data-driven, expert commentary on market and economic trends. You can find ROI on the Reuters website, and you can follow us on LinkedIn and X.

The dollar's slide accelerated on Thursday, as more evidence of cooling U.S. price pressures weighed on Treasury yields and dragged the greenback to lows against a basket of major currencies not seen in more than three years.

In my column today I look ahead to next week's Fed meeting. With inflation cooling but tariffs yet to kick in, is Fed policy still in a "good place" as Chair Jerome Powell repeatedly said last month? More on that below, but first, a roundup of the main market moves. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

Data refreshes every time you open this email. For more U.S. market news, click here. Please send any feedback to morningbid@thomsonreuters.com.

The dollar grabbed the global market spotlight on Thursday, and once again, for the wrong reasons. If it's failing to get any support when U.S. bond yields are rising, it's getting hit even harder when they're falling. As was the case on Thursday. 

After a string of recent soft consumer inflation prints, it was the turn of producer price inflation to cement the view that U.S. price pressures aren't as hot as economists have thought. Tariffs have yet to be fully felt, of course, but right now inflation across the board is pretty tame.

Rates traders brought forward the timing of when they think the Fed will cut interest rates to September from October and, also supported by a strong 30-year bond auction, yields fell across the curve. 

The dollar index is now down 10% year to date, and the euro is up 12%. We're only at the half-way point of the year, but it's worth noting that the last time the dollar fell more than 10% in a calendar years was 2003. 

Much of its weakness this year is down to non-US investors hedging their exposure to U.S. assets much more than they have previously. In effect, that equates to selling dollars, and European pension and insurance funds are at the heart of it.

"Our analysis suggests there is much more still to come," reckon analysts at BNP Paribas, recommending that investors buy the euro with a target of $1.20. 

They calculate that if Dutch and Danish pension funds reduce dollar exposure to 2015 levels as a share of total assets under management, they have a further $217 billion to sell. And that's just Danish and Dutch funds.

On the tariffs front, investors are still digesting this week's US-China deal, outlined by Washington on Wednesday and confirmed by Beijing on Thursday. Still, there is some ambiguity around key elements of the deal, including rare earth export licenses and details of the tariffs. 

JP Morgan's U.S. economists calculate that, all told, the total effective U.S. tariff rate will be around 14%. When levied on $3.1 trillion of imported goods, that equates to a tax on U.S. businesses and consumers of over $400 billion. It remains to be seen how that is split, but history shows consumers bear most of the burden, they note.

"The stagflationary impulse from higher tariffs has lowered our GDP growth outlook for this year (4Q/4Q) from 2.0% at the start of the year to 1.3% currently," they wrote on Thursday.

On the other hand, economists at Oxford Economics on Thursday raised their 2025 U.S. GDP forecast to 1.5% from 1.3% and said the likelihood of recession has fallen.

You pay your money, you take your choice.

At the Federal Open Market Committee meeting next week, investors will scrutinize all communications for any sign that the recent softening in U.S. inflation could be enough to nudge policymakers closer to cutting interest rates.

Current economic data might be leaning in that direction, but policy out of Washington could well keep Chair Jerome Powell and colleagues in 'wait and see' mode.

No one expects the Fed to cut rates next week, but businesses, households and investors should get a better sense of policymakers' future plans from the revised quarterly Staff Economic Projections and Powell's press conference. 

Powell was very clear in his post-meeting press conference last month that the Fed is prepared to take its time assessing the incoming economic data, particularly the impact of tariffs, before deciding on its next step. 

He told reporters no less than eight times that policy is in a "good place" and said four times that the Fed is "well positioned" to face the challenges ahead. Will he change his tune next Wednesday? 

Annual PCE inflation in April was 2.1%, the lowest in four years and virtually at the Fed's 2% target, while CPI inflation in May was also lower than expected. The labor market is softening, economic activity is slowing, and recent red-hot consumer inflation expectations are now starting to come down. 

In that light, it may be surprising that markets are not fully pricing in a quarter-point rate cut until October.     

"The upcoming meeting offers an opportunity (for Fed officials) to signal that the recent mix of tamer inflation and softer consumption growth warrant a careful 'recalibration' of rates lower, while remaining very cautious about what comes next," economist Phil Suttle wrote on Wednesday.

But there are two well-known barriers that could keep the Fed from quickly re-joining the ranks of rate-cutting central banks: tariffs and the U.S. fiscal outlook.