Foreign Exchange Commentary

Summary

• The U.S. Dollar Index sold-off this morning after the U.S. economy only added 22,000 jobs in August.
• The Federal Reserve’s independence remains a subject of high scrutiny with the DOJ opening a criminal investigation into Fed Governor Lisa Cook over allegations of mortgage fraud
• Stephen Miran, Chair of the Council of Economic Advisors, testified in front of the Senate Banking Committee regarding his nomination as the next Federal Reserve Governor
• The FOMC is entering its blackout period with one 25bp rate cut expected for the September meeting
• The Bank of England is exploring bond market reform to protect the Pound-sterling from rapid declines
• France’s continued budget woes are hampering the Euro amidst a potential political reform
• The Indian Rupee is trading near all-time lows, and faces continued downside pressure amidst the 50% tariffs imposed by the U.S.

Dollar Remains Rangebound before FED Blackout
The U.S. Dollar Index (DXY) was trading between 97.60 and 98.90 for most of the month before rapidly selling off Friday morning. Currently trading at 97.45, the sell-off was attributed to the weak Nonfarm payrolls number which affirmed a 25bp rate cut for September’s Federal Reserve meeting. The threat of Fed Independence remains high with the Bank of England’s Andrew Baily calling President Trump’s attacks “very alarming.” In the most recent bout, the Department of Justice has opened a criminal investigation into Fed Governor Lisa Cook over allegations of mortgage fraud between 2 of her residences in Michigan and Georgia. Despite pressure from the President and his team for Cook to resign, her lawyers remain adamant that the firing attempt is overreach and part of Trump’s repeated efforts to influence the independence of the Federal Reserve.

Stephen Miran, President Trump’s Chair of Economic Advisors testified on Thursday morning in front of the Senate regarding his nomination to serve the remainder of Fed Governor Adriana Kugler’s term after her surprise resignation. Miran, in a paper for the Manhattan Institute in 2024 called for Federal Reserve reform, claiming that Fed Governors tend to “serve at the will of the U.S. president” and languished the “revolving door between the Fed and the executive branch”. Given his reluctance to resign from his position as chair of the Economic advisors in favor of an unpaid leave of absence nominee, Miran drew scrutiny from lawmakers despite his vows to act independently. With no signs of republican opposition, it will likely be a quick confirmation and may give Miran the opportunity to provide input in the September interest rate decision.

Currently, a rate cut is priced in with near 100% certainty for the September meeting. The labor market continues to show signs of softening with only 22,000 jobs added in August’s Nonfarm payroll report despite an expected 75,000. In addition, for the first time since April 2021, there are now more Americans out of work than jobs available based on the job openings to unemployment ratio published by the St. Louis Federal Reserve. While FED Governors Michelle Bowman and Christoper Waller are calling for rate cuts, there is still hawkish opposition. Next week’s CPI data is expected to come in hotter than last month with a 2.9% pickup projected year-over-year. The market seems to be pricing in multiple rate cuts despite above-target inflation prints because of the soft labor data. Currently, there is an 80% chance of an October cut and a 93% chance of a December cut with a year-end implied rate of 3.50% which could mean further U.S. dollar declines.

Lastly, the Justice Department is requesting that the supreme court expediate the Trump Administration’s appeal regarding the legality of Tariffs. After a 7-4 ruling decreeing tariffs illegal by the U.S. Court of Appeals for the Federal Circuit last Friday, the case is expected to be picked up by the supreme court in the coming weeks which should add some volatility to the greenback.

Bank of England eyes bond market reform
On Tuesday, the pound dropped to nearly 1.3340 after starting the day at 1.3532 after 30-year GILTs spiked. The United Kingdom is experiencing a cycle of elevated bond yields due to a combination of a weak growth outlook, continuous deficit spending, and persistent inflation. A similar situation in 2022 saw the pound drop to 1.05 with a high Gilt yield spike. As long-term yields are now trading almost 200 basis points higher than they were doing the 2022 crisis, this problem is only exacerbating and as such, the central bank is planning to reform the English repurchase agreement market which allows investors to borrow against Gilts to make them more attractive to investors. As the British economy continues to contract, watchdogs and the BOE itself are warning of structural changes in demand with “bond vigilantes” rapidly emerging from the shadows. For now, there are little to no cuts priced in for the year as reported on Bloomberg’s World Interest Rate Projections which was partially corroborated by Friday’s stronger than expected Retail Sales print which was up 0.6% for the month vs 0.2% expected.

France hampers the Euro
The Euro has seen a sharp rally since the beginning of the year up some 14% YTD against the dollar. Among the drivers of this rally was the rotation out of US dollars and into Euros holdings as a response to uncertainty regarding the US economy after president Trumps inauguration. However, the French economy has continued to lag with French bond yields widening to historical levels: French sovereign bonds (OATs) are trading nearly 77 bp’s premium against German bunds. With already the 3^rd highest level of debt in the eurozone, the French are currently spending 114% of their GDP. To combat this, France is holding a no-confidence vote amidst turbulent political pressure against new French Prime Minister Francois Bayrou over a controversial 2026 spending budget. If French President Emmanuel Macron replaces the prime minister with new elections, OATs could sell-off further. The implications of this are still uncertain but rising yields and political uncertainty from the Eurozone’s second largest economy could keep the ECB’s interest rate deposit stagnant for an extended time. This week, the Eurozone posted a slightly hotter inflation read with a 2.1% print vs a 2.0% but unemployment has remained stable around 6%. The ECB is largely expected to hold the interest deposit rate at 2% next week but maintains a cautious outlook as GDP growth remains stagnant around 1.5%. The Eurozone’s geopolitical concerns are not over yet either, after a plan to deploy foreign troops by European nations was discussed, Russian president Vladimir Putin spoke Friday morning and decried that any western troops deployed to Ukraine before a peace deal was reached would be seen as “Targets.”

INR at all-time lows
The Indian Rupee is trading near all time lows after dipping as low as 88.30 on Friday. Currently trading at 88.27, the rupee is expected to continue to weaken as the Trump administration is not currently considering an offer from India to drop all tariffs towards the U.S. The once fond relationship between India’s government and the Trump administration has continued to weaken as Indian Prime Minister Narendra Modi was spotted laughing alongside Russian President Vladimir Putin and Chinese leader Xi Jinping during a Chinese summit in Shanghai. The Indian Rupee is expected to continue to weaken to remain competitive against the 50% tariffs imposed by the U.S.