FX Alert : From Fizz to Fizzle and The Euro's Litmus Test
The fine print of the EU-US agreement left a metallic aftertaste: more energy imports, lopsided tariff relief, and not much else.
Stocks are trading heavy as the bubbly optimism from the recent tariff deals with Japan and the EU starts to go flat. What looked like a celebration is now tasting more like day-old prosecco—investors are sobering up fast. The fizz has faded, the foam’s settled, and markets are shifting from headline euphoria to hard data reality.
Equities are pulling back—not in protest, but because the trade deal outcomes were already in the cards. These deals were telegraphed, front-run, and now fully priced and poured. The eurozone barely got a toast—rates barely budged, and stocks reversed after a brief pop. The fine print of the EU-US agreement left a metallic aftertaste: more energy imports, lopsided tariff relief, and not much else. Call it a handshake at the clubhouse, not a blueprint for growth.
Now the spotlight shifts—bright and unrelenting—onto a macro gauntlet. The Fed meets Wednesday, but Powell’s not expected to move. With the global effective tariff regime running at 18.2%, the Fed’s likely to play the long game—wait, see, and stall before any September cut. That bet only tightens if Friday’s nonfarm payrolls come in stronger than expected.
Until then, traders will be parsing every line of consumer confidence data, squinting at JOLTS prints, and front-running the Friday fireworks. In short, it’s a week where digits matter more than diplomacy.
Meanwhile, over in Europe, Dutch pension reforms are whispering, not in a positive way, through the fixed-income market—subtle, but potentially seismic.
Stateside, FX markets still seem to prefer Trump’s newfound taste for structured deals over brinkmanship. But make no mistake: whatever confidence remains is conditional. A weak data print could reignite the cut chatter. A strong one? It could push rate expectations further out, flattening the curve and taking carry trades with it. Hence, the next direction for the dollar will hinge on the US data docket: 1.1450 or 1.1650?
The long euro trade just met its first major litmus test in a while—and it didn’t inspire confidence. This wasn’t a garden-variety pullback; it was the market's way of questioning whether conviction trades built on the shaky US political foundations can hold through a more challenging macro stretch. EUR/USD had already been shifting lower, but recent price action exposed just how fragile the positioning is in a heavy negative carry environment for dollar shorts.
The DXY is on a track to its best 2-day session since early May, not just because of the euro's weakness, but also because the dollar found broad-based support. It looks like specs jumped into EUR/USD longs during early Asia yesterday, expecting follow-through on the EU trade deal. But when Europe failed to show up to the party, the momentum died—and the slow bleed turned into a wider positioning flush. The DAX, which had been moving in lockstep with EUR/USD, sold off too, adding fuel to the fire.
That much-hyped EU-US trade deal? The shine came off fast. Once investors combed through the fine print—blanket 15% tariffs, pharma and semis included—it looked more like a PR exercise than a policy shift. The narrative flipped from “uncertainty removed” to “costs imposed.” And Europe, once again, is left trying to stir up domestic demand to offset the external hit.
Technically, EUR/USD is teetering. If it can’t reclaim 1.1600 today on positive EU data flow, 1.1500 becomes a magnet. There’s no panic, but the price action reeks of exhaustion. The conviction longs are thinning out, and the carry is no friend here either.
It’s not just EUR/USD under review—other crowded trades in Latam and EMEA high yield FX could also be facing a reckoning if risk sentiment wobbles. With the Fed forward guidance looming and a full macro calendar in play, this is a bad time to be over-positioned in anything that can't take a punch.
Today’s JOLTS job openings and consumer confidence data will help shape near-term dollar direction. Meanwhile, geopolitical tension simmers. Trump’s shortened deadline for a Russian ceasefire marginally raises the odds of secondary sanctions—potentially bullish for crude, and by extension, the dollar. If oil rallies, it tightens global financial conditions—again, dollar-positive.
Also on deck: $44 billion in 7-year Treasuries. The issuance will go unnoticed unless it doesn’t. Volatility in the long end has been eerily subdued, but tomorrow’s Quarterly Refunding Announcement could disrupt that calm if longer-dated coupon issuance ticks up unexpectedly.