1. July FOMC Rate‑Setting Meeting: Rates Held Steady, Internal Committee Divergence Intensifies, U.S. Dollar Faces Initial Selling Pressure (July 28‑29)

At the Federal Reserve’s July Federal Open Market Committee (FOMC) meeting, the federal funds rate was maintained within the 3.50%‑3.75% range, marking the fifth consecutive pause in rate hikes. This outcome largely matched mainstream market expectations; nevertheless, three dissenting votes were cast, with three committee members explicitly supporting a 25‑basis‑point rate increase. This reflected widening hawk‑dove divisions within the committee and became the most important driver shaping recent foreign‑exchange markets.

In the post‑meeting press conference, newly‑appointed Federal Reserve Chair Kevin Wash dispensed with traditional explicit forward guidance and offered no clear market signal regarding the interest‑rate path. He repeatedly stressed that “policy is entirely data‑dependent” and that “inflation remains far from the 2% target”. At the same time, he acknowledged resilience in U.S. economic growth, noted that AI‑driven capital investment continues to fuel economic vitality, and observed that the labour market is gradually rebalancing. Still, he gave no indication whether rate hikes would resume in September. Markets interpreted this ambiguous stance as leaning dovish. Following the meeting, accumulated long‑U.S.‑dollar positions were unwound en masse, triggering a notable pull‑back in the U.S. Dollar Index. The index fell 1.3% over the week, declining swiftly from above 101 toward the psychological 100 level. Non‑U.S.‑dollar currencies including the euro, British pound, Australian dollar and Japanese yen all gained rebound momentum.

According to the Summary of Economic Projections (SEP, dot‑plot), the Federal Reserve revised upward its 2026 core PCE inflation forecast to 3.3%, acknowledging policymakers’ view that disinflation is proving more difficult than previously anticipated. It also slightly raised its U.S. GDP growth forecast to 2.2%. These contradictory projections — persistently elevated inflation alongside an economy showing no obvious slowdown — pushed foreign‑exchange markets into a high‑volatility range‑bound environment, making sustained one‑sided moves in the U.S. dollar difficult. Every release of U.S. inflation and employment data triggers rapid repricing across exchange rates.

Two competing narratives have taken hold in markets after the meeting. The hawkish view holds that inflation re‑acceleration risks remain, leaving a September rate‑hike option on the table should CPI rebound. The dovish perspective points to cooling signs in the labour market and warns that further rate increases would substantially raise recession risks, favouring a wait‑and‑see stance for additional evidence. No unified consensus has formed among foreign‑exchange traders. The U.S. Dollar Index continues to swing within a range with a distinctly lower central level. Major institutions have revised down the expected primary trading band for August to 99‑102, no longer forecasting a move above 103.

2. Release of FOMC Meeting Minutes Cools Expectations for Aggressive Hikes; Foreign‑Exchange Markets Reprice Rate Curves (August 1‑2)

In early August, the Federal Reserve published the full minutes from the July rate‑setting meeting. The text acknowledged that inflation is falling more slowly than desirable, and some members continued to warn of inflation‑rebound risks stemming from energy prices and tariff effects. Even so, overall language was less hawkish than markets had feared. The minutes clarified that rate hikes are not the baseline scenario; additional policy tightening would only occur if inflation rises materially again. For now, policymakers prioritise patience and optionality over rushed further tightening.

These minutes significantly scaled back market pricing for multiple successive rate increases. Short‑dated U.S. Treasury yields declined, altering interest‑rate‑differential dynamics and driving foreign‑exchange moves. The U.S. Dollar Index weakened further, hitting a one‑month low. EUR/USD tested the 1.09 level, GBP/USD rebounded in tandem, and USD/JPY came under downward pressure. Risk‑sensitive currencies such as the Australian dollar and New Zealand dollar also found support.

Institutional analysis notes that the U.S.‑dollar sell‑off was not solely driven by fundamental deterioration but stemmed to a large degree from position unwinding. Ahead of the July meeting, substantial capital had built long‑U.S.‑dollar bets on the “higher‑for‑longer” rate narrative. Post‑minutes, mass position liquidation amplified dollar losses. The ING foreign‑exchange strategy team pointed out that without upside inflation surprises, ongoing long‑position unwinding may keep pressure on the U.S. dollar, though this does not mark the start of a secular dollar bear market, merely a pause in its prior strong performance.

3. U.S.‑Japan Coordinated Exchange‑Rate Intervention Combined with Shifting Fed Expectations; Sharp Volatility in USD/JPY (Around August 3)

Amid prolonged sharp yen depreciation, rare U.S.‑Japan coordinated foreign‑exchange‑market intervention — the first such episode since 2011 — resonated with Federal Reserve policy expectations and dominated price action in USD/JPY. Japan’s Minister of Finance publicly stated close communication with the U.S. Treasury and pledged to intervene in currency markets without hesitation whenever necessary to prevent disorderly yen depreciation.

Receding Fed rate‑hike expectations, alongside prospects for narrowing U.S.‑Japanese interest‑rate differentials and official intervention threats, triggered a sharp drop in USD/JPY from elevated levels. Major investment banks nevertheless warn that fundamental interest‑rate gaps between the two economies remain substantial. Even if the Federal Reserve pauses hikes, U.S. real interest rates stay far above Japan’s. Intervention alone is unlikely to reverse the longer‑term trend. Should upcoming U.S. inflation data surprise to the upside and hawkish Fed pricing return, USD/JPY can easily rebound. Intervention primarily curbs excessive swings rather than changing the broader directional trend.

An interesting pattern has emerged across foreign‑exchange markets: whenever hawkish Fed‑official commentary lifts Treasury yields, USD/JPY strengthens; whenever soft U.S. labour‑market or inflation data fuels rate‑cut speculation, the yen receives dual tailwinds from narrowing rate differentials plus intervention expectations, exhibiting markedly higher volatility versus other major currency pairs.

4. July U.S. Non‑Farm Payrolls Disappoint, Triggering Turmoil in Foreign‑Exchange Markets; Probability of September Fed Hike Falls Sharply (Night of August 7 Payroll Release)

Released by the U.S. Bureau of Labor Statistics on the evening of August 7 (Beijing time), the July employment report represented the most market‑moving event for foreign‑exchange markets so far in August.

Key figures: July non‑farm payrolls fell by 23,000, versus market expectations of an 80,000 increase. Furthermore, May and June payroll readings underwent substantial downward revisions totalling 103,000 jobs, confirming cooling conditions in the labour market. Counterintuitively, the unemployment rate edged down to 4.1%, driven by a falling labour‑force participation rate as some workers exited the labour pool. This internally‑contradictory report created policy dilemmas for the Federal Reserve.

Immediately following publication, global foreign‑exchange markets reacted rapidly. The U.S. Dollar Index plummeted, hitting an August low near 99.40. The CME FedWatch Tool instantly adjusted market‑implied odds for a 25‑bp September hike. Interest‑rate futures reduced cumulative market expectations for rate increases through end‑2026 from 32 basis points to 28 basis points. U.S. Treasury yields slumped, non‑U.S.‑dollar currencies broadly advanced, and precious metals surged amid the combined effects of a weaker dollar and lower real yields.

Nevertheless, internal contradictions within the jobs report enabled partial price recovery. After its flash crash, the U.S. Dollar Index recouped some losses and avoided a full‑blown collapse. The downward unemployment‑rate reading was the key mitigating factor. Several Fed officials subsequently stated publicly that the unemployment rate is central to assessing labour‑market health and that falling payrolls alone cannot prove full‑blown labour‑market deterioration. Fed official Barkin noted slowing net hiring without mass corporate layoffs, characterising conditions as a soft cooling rather than hard economic contraction. These remarks restrained excessive market rate‑cut speculation and lent some support to the U.S. dollar.

Markets broadly agree that this payroll report provides no clear answer for the Federal Reserve. The decision over additional September tightening hinges on upcoming U.S. CPI and PPI inflation prints. Renewed inflation strength would keep a September hike alive; sustained disinflation would make a Fed hold the most probable outcome. Foreign‑exchange markets have entered an “inflation‑data‑driven” regime, where breakouts for major currency pairs require catalysts from inflation reports.

5. Successive Speeches by Fed Officials Amplify Internal Divisions, Continuously Shifting Foreign‑Exchange‑Market Expectations (Early August)

Entering August, multiple regional Federal Reserve Bank presidents delivered public remarks that further exposed internal disagreements, repeatedly revising market pricing for the Fed policy path and indirectly shaping foreign‑exchange sentiment.

1. San Francisco Fed President Daly backed the July rate hold. She observed tariff‑driven inflation pressures easing at the margin, cited oil prices affected by Middle‑East geopolitics as an important inflation variable, and warned that AI‑infrastructure investment may keep pushing certain components of prices higher. She advocated policy patience. Her overall stance tilted neutral‑to‑dovish and triggered mild U.S.‑dollar selling after her speech.
2. Several hawkish officials continue to keep rate‑hike possibilities open, stating readiness for further tightening should inflation re‑surge. Some committee members already voted for a hike at the July meeting, demonstrating a persistent hard‑line‑tightening faction inside the FOMC.

Markets are paying close attention to the late‑August Jackson Hole Global Central Bank Symposium, where Fed Chair Kevin Wash will deliver a keynote address regarded as the top near‑term risk event for foreign‑exchange markets. Traders seek policy signals for the September meeting from his speech. A hawkish address would lift Treasury yields, support the U.S. dollar and pressure non‑U.S.‑dollar currencies. A reiteration of data‑dependent patience would see the dollar persist in its weak‑looking range‑bound trading pattern.

6. Latest Foreign‑Exchange‑Market Views from Major Institutions Based on Fed‑Policy Logic

1. CICC Foreign‑Exchange Team: The medium‑term outlook for the U.S. dollar features a defined ceiling and floor, with range‑bound weakness. Gradual labour‑market cooling caps dollar upside, while Middle‑East geopolitical risks and U.S. economic resilience supported by AI‑related investment prevent deep dollar declines. The baseline August trading band for the U.S. Dollar Index stands at 99‑102. Going forward, U.S. inflation prints and Fed‑official communications constitute core market drivers; interest‑rate‑differential moves dominate major exchange rates. Markets should avoid over‑pricing rapid rate cuts: inflation stickiness is substantial, and Fed easing will likely be pushed further into the future.
2. HSBC: While receding hike expectations apply near‑term pressure on the U.S. dollar, America’s growth edge relative to other economic blocs remains intact, so a long‑term dollar bear market is not the base case. Rebound opportunities may emerge following corrective weakness. FOMC internal splits merit close monitoring. As long as some officials advocate hikes, full market pricing for rate cuts is unlikely, limiting the rebound scope for non‑U.S.‑dollar currencies.
3. ING: The current U.S.‑dollar weakness largely reflects position adjustment rather than a fundamental regime shift. The core transmission chain governing dollar performance is: U.S. inflation data → Fed rate expectations → U.S. Treasury yield differentials → U.S. Dollar Index → individual foreign‑exchange prices. Without sustained disinflation, the Federal Reserve is unlikely to fully close the door to rate hikes, making a large‑scale secular dollar bear market improbable.

7. Upcoming Key Fed‑Related Events for Foreign‑Exchange Markets

1. U.S. CPI and PPI inflation releases: Directly shape FOMC policy inclinations for September and represent the most critical near‑term catalysts for foreign‑exchange markets.
2. Late‑August Jackson Hole Global Central Bank Symposium, keynote speech by Fed Chair Kevin Wash.
3. September FOMC rate‑setting meeting. Markets are currently pricing a tug‑of‑war between two scenarios: a rate hike versus unchanged policy rates.