Meanwhile, comments from Fed officials showed growing division within the central bank. Governors Lisa Cook, Michelle Bowman, and Philip Jefferson, along with regional Fed presidents like Loretta Mester, supported a patient and data-driven approach. They pointed to the solid economy and the temporary nature of tariff-related inflation as reasons not to rush into rate cuts. On the other hand, Governor Christopher Waller strongly advocated for a 25 basis point cut in July, arguing the Fed should act early to prevent economic risks from escalating and could ignore short-term tariff inflation.

Market pricing for Fed rate cuts moved up and down all week. After the hot CPI print, expectations for year-end cuts dropped below 45 basis points. The Powell rumors temporarily increased bets on more easing, but by the end of the week, markets were pricing in around 46 basis points of cuts by December. A move in July looked unlikely, but a cut by September remained a focus.

In the geopolitical front, tariffs dominated headlines. President Trump opened the week by threatening 30% tariffs on the EU and Mexico and 100% tariffs on Russia if a peace deal in Ukraine isn’t reached within 50 days. While the extended deadline on Russia was seen as a sign of de-escalation, the EU threat added tension to ongoing trade talks. Negotiations between US and EU officials continued all week but turned sour on Friday amid reports that Trump was demanding a minimum 15–20% tariff on all EU goods and rejected the idea of lowering existing tariffs on cars.

There was also a thaw in US-China relations, as the US approved some Nvidia H20 AI chip sales to China. Commerce Secretary Howard Lutnick linked the move to broader talks over rare earth materials.

Market sentiment shifted throughout the week. Early fears of rising inflation gave way to concerns about political risk and the independence of the Fed. The DXY index reached a high of 98.95 on Thursday, its strongest level since late June, supported by solid data. But it lost momentum after the Powell rumors and dovish comments from Governor Waller, finishing the week up around 0.6% but off its highs. The US Treasury yield curve steepened sharply on Wednesday as markets considered the possibility of a more dovish replacement for Powell, although that move mostly reversed after Trump’s denial.

In the near term, the USD may hold its ground or even extend gains, supported by a resilient US economy, consumer confidence has been rising since May, PMIs remain in expansion, unemployment is stable, and inflation remains sticky .. leaving the Fed in no rush to cut rates.

While markets are watching the potential for a change in Fed leadership, with some concern that a Trump aligned chair could weigh on the dollar, we believe the president’s influence over monetary policy would remain limited. As a result, we don’t view the uncertainty around Powell’s future as a high probability trigger for a sharp, sustained USD selloff.

That said, we maintain a bearish longer-term view, as most G10 currencies have outperformed the dollar year to date beyond what short-term fundamentals would justify, with portfolio flows becoming a dominant force. Europe, in particular, has benefited from reallocations away from US assets, and flows have recently explained more of the EUR/USD move than traditional cyclical factors. Unless new catalysts like deeper or earlier Fed cuts emerge, dollar depreciation may slow from here, but the broader trend still points to weakness as global investors continue to reduce their US exposure.