FX Weekly Recap: Why the Dollar Rebounded
This FX weekly recap for 24–28 August was ultimately defined by a sharp late-week rebound in the dollar after a shift in Federal Reserve expectations transformed what had initially been a relatively subdued week for currencies.
Early in the week, softer Treasury yields and questions around U.S. fiscal policy kept the dollar contained. A slightly hotter July PCE inflation report and cautious comments from Fed officials then started rebuilding support, but the decisive move came on Friday when Fed Chair Kevin Warsh used his Jackson Hole speech to signal that further tightening could still be necessary if inflation fails to move convincingly back toward target.
Markets responded quickly. The probability of a September Fed rate hike jumped from roughly 35% before the speech to around 55–58%, the U.S. two-year Treasury yield climbed about 13 basis points on Friday, and the dollar index finished the week roughly 0.9% higher — its strongest weekly gain in around ten weeks
Biggest FX Movers: USD Leads, CAD Lags
USD was the strongest major currency, with Warsh’s speech reinforcing the idea that the Fed may have more work to do before declaring victory over inflation. EUR/USD fell roughly 0.8% over the week, GBP/USD broke a four-week winning streak, while USD/JPY pushed back above 160 despite growing expectations for another Bank of Japan rate increase.
At the other end, CAD was among the weakest majors, losing around 1% against USD, its worst weekly decline in more than two months. The catalyst was less about Canadian macro data and more about trade policy. U.S.-Canada negotiations deteriorated after Washington announced new 50% tariffs affecting Canadian goods, including automotive and steel products, prompting retaliatory measures from Ottawa.
That weakness came despite Canadian second-quarter GDP expanding at a 3.3% annualized pace. The stronger growth number did little to change expectations that the Bank of Canada will keep rates at 2.25% next week, leaving the widening U.S.-Canada yield differential and trade uncertainty as the more important drivers for CAD. Traders following the pair can also track the broader setup on FindBias’s USD/CAD page.
Australia provided the clearest counter-story. AUD held up much better than most other non-dollar majors after domestic inflation and spending data forced traders to reconsider the probability of another RBA hike. That relative resilience also supported AUD against currencies such as NZD and CAD.
Kevin Warsh Revives Fed Rate Hike Risk
The biggest surprise was Kevin Warsh’s Jackson Hole message.
Heading into the speech, investors had relatively modest expectations for explicit near-term policy guidance. Warsh has previously criticized heavy reliance on forward guidance, and several analysts expected his first Jackson Hole appearance as Fed chair to avoid committing the central bank to a particular path. Markets entered Friday assigning only around a one-in-three chance to a September hike.
Instead, Warsh made it clear that persistent inflation could require additional policy tightening. The reaction was immediate: September hike odds climbed above 50%, short-dated Treasury yields jumped, equities came under pressure and the dollar rallied broadly. Gold fell more than 3% on Friday as higher real-rate expectations reduced demand for non-yielding assets.
The move mattered because it changed the market’s interpretation of the Fed’s reaction function rather than simply confirming an existing consensus.
Key Macro and Central Bank Developments
U.S. inflation had already prepared the ground. July headline PCE inflation rose 3.7% year-on-year, slightly above expectations, while core PCE increased 3.3%. The data alone produced only modest Fed repricing, but it reinforced concerns from several policymakers that inflation remained too persistent for the central bank to relax. The PCE price index is published by the U.S. Bureau of Economic Analysis.
In Australia, the policy debate moved in the opposite direction to what markets had expected only weeks ago. RBA minutes showed that several members saw a risk that inflation pressures could require additional tightening. July household spending then rose 1.1% month-on-month, while underlying inflation remained stubborn. By the end of the week, markets were pricing roughly a 47% probability of a September RBA hike, compared with only around 13% earlier in the week.
The ECB also remained uncomfortable with inflation. Isabel Schnabel argued that rates would probably need to rise further, and policymakers appeared increasingly inclined toward another move in September. That helped EUR at points during the week, but the support was insufficient once U.S. yields surged on Friday.
In the UK, Governor Andrew Bailey was more restrained, emphasizing limited evidence of second-round inflation effects and a softer labor market. Markets continued to price only gradual additional Bank of England tightening, which left sterling vulnerable to the late-week dollar rally.
Japan was another case where domestic tightening expectations could not fully overcome the dollar story. Expectations for a September BOJ hike increased significantly, and Tokyo inflation remained firm, but USD/JPY still moved toward 160 as U.S. yields rose. The yen’s weakness is especially notable given Japan’s recent record intervention to support the currency.
For the RBNZ and SNB, there was no equivalent market-moving surprise this week. New Zealand remained focused on next week’s expected rate hike, while Switzerland’s zero-rate backdrop continued to limit the franc’s relative yield appeal. For a broader view of policy settings across major currencies, see FindBias’s Central Banks dashboard.
Geopolitics and FX Risk Sentiment
The U.S.-Canada tariff escalation was the geopolitical development with the clearest direct FX impact, pushing CAD lower even as domestic Canadian data remained respectable.
Energy markets moved in the opposite direction. Brent crude ended the week above $89 but fell more than 5% as hopes increased for improved shipping flows through the Strait of Hormuz despite the continuing Middle East conflict. The fall in oil offered some relief to global inflation expectations, although energy supply risks remain far from resolved.
Friday’s hawkish Fed repricing also produced a more defensive cross-asset tone: Treasury yields rose, equities softened and precious metals sold off. For FX, however, the dominant transmission mechanism was straightforward — higher expected U.S. rates restored the dollar’s yield advantage.
What FX Traders Should Remember
- The Fed narrative changed: markets can no longer treat further U.S. tightening as a low-probability scenario.
- USD regained rate support, finishing its strongest week in roughly ten weeks.
- CAD suffered from trade risk, with tariffs outweighing unexpectedly strong Canadian GDP.
- AUD was unusually resilient as sticky inflation and strong spending revived RBA hike expectations.
- The next phase of FX moves will depend on whether incoming data confirms or challenges the hawkish repricing seen after Jackson Hole.
FX Week Ahead: Payrolls, RBNZ and Bank of Canada
The next week brings several events capable of testing these new expectations. You can follow the key releases and decisions on the FindBias economic calendar:
- RBNZ and Bank of Canada decisions on Wednesday, with New Zealand expected to hike while Canada is widely expected to hold.
- Eurozone inflation, which will test the increasingly hawkish ECB narrative.
- China’s PMIs, important for global growth sentiment and AUD/NZD.
- Friday’s U.S. payrolls report, likely the most important test of the newly revived case for a September Fed hike.
This article is for informational purposes only and does not constitute financial advice. Consult a licensed financial advisor before making investment decisions.
