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Trump’s assault on Fed rattles markets

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21 July 2025

Written by
Enrique Díaz-Álvarez

Chief Economist

The stabilization of the US dollar hit an air pocket last week after a minor Trump official announced that the president was getting ready to fire chair Powell.

W
hile it is far from clear that Trump would have the power to do so, the market’s reaction was swift and brutal, and for a few minutes we saw a reprise of the “sell America” trade that shook the world back in April: stocks, bonds and the currency were sold off mercilessly. Once again, the ferocious market reaction forced the Trump administration to backtrack and Trump himself issued a hurried denial that any such move was imminent. While the market rebounded just as swiftly, and the dollar actually managed to end the week modestly up against most of its peers, the episode was a reminder of both the risks that Trumnpian chaos presents to markets , and the key role the latter are playing in restraining the president’s chaotic impulses.

Now that the issue of Federal Reserve leadership is hopefully put to rest for the time being, market focus should shift back to the unpredictable trade and tariff headlines, as the clock ticks toward the latest August 1st deadline set by Trump.Beyond that, Thursday looks set to eb an unusually volatile day. In addition to the ECB July meeting, the PMI advanced indices of business activity will be published in all the main economic areas. In addition a slew of second tier data everywhere will help us confirm or reject the economic narratives that have been developing:US resiliency, steady but sluggish activity in the Eurozone, and a worrisome slowdown in the UK.

GBP

Data out last week in the UK carried a distinct stagflationary whiff. Inflation surprised to the upside, in particular the more stable core subindex.Services inflation remains stuck near 5%. Unemployment ticked up, and the number of payrolled employees fell for a second consecutive month, albeit the enormous drop of the month prior was revised upwards. The downbeat data of the last few weeks is reflected in the slow grind downward of Sterling against the Euro, while it keeps holding well against the dollar. The silver lining for the UK is that the PMI indices have been holding up better than the lagging real data so far- This week´s release therefore takes on added importance.

EUR

The ECB is expected to hold rates unchanged at its July meeting this Thursday. We also expect them to provide little guidance for the future, leaving its options open. With the cutting cycle largely complete, attention turns to the trade war with the US. Markets are ratcheting up their expectations of the level of tariffs that the US will levy inon European goods slowly, as trade talks seem to be making slow progress and we are getting closer to the August 1st deadline. The July PMI indices are expected to once again show sluggish growth, just sufficient to keep the economy near full employment.

USD

Beyond the Powel headlines, the US economy continues to show resilience even as the first hints of tariff impact appear in the inflation numbers. Retail sales, weekly jobless claims and industrial production all came in higher than expected. While inflation numbers did not deviate much from expectations, core goods inflation firmed up somewhat, in a hint of tariff pass through, as the positive impact of pre-tariff stockpiling fades. Full employment, healthy demand growth, a massive fiscal deficit and firm inflation are not consistent with easier policy and we expect the Fed to resist Trump’s pressure and keep rates unchanged next week.

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