Central Banks Diverge: RBA Leans Dovish, Fed Holds Amid Tariff-Driven Uncertainty

Global central banks are showing diverging policy stances as economic conditions and inflationary pressures evolve differently across regions. While the Reserve Bank of Australia (RBA) appears poised to cut rates amid easing inflation, the U.S. Federal Reserve remains in a holding pattern, cautious of the inflationary impact from expanding tariffs. These differing trajectories could be shaping new trends in the markets, adding FX volatility, and market expectations ahead of key economic data releases and central bank meetings.

Key Points

• RBA Expected to Cut Rates in August

• Fed Holds Steady, Market Pricing for September Cut Falls

• Tariff Uncertainty Clouds U.S. Inflation Outlook

• Gold and Equities React to Hawkish Fed Tone

• Traders Recalibrate Rate Cut Expectations

RBA: Dovish Tilt as Inflation Cools

• Q2 CPI Data: Headline inflation came in at 0.7% QoQ vs. 0.8% expected; annual inflation slowed to 2.1%.

• Policy Outlook: Minutes show members leaning toward a cut, pending further inflation confirmation.

• Market Expectation: Rate cut in August is increasingly priced in as retail and labor data remain soft.

Australia’s cooling inflation and subdued consumer spending support the case for RBA easing, marking a clear dovish divergence from the Fe

Fed: On Hold Amid Inflationary Uncertainty

• Rate Decision: Held steady at 4.25%-4.50% for the fifth consecutive meeting.

• Inflation Risks: Chair Powell emphasized tariffs may cause persistent inflation, especially in goods.

• Split Committee: Two dissenters (Bowman, Waller) favored a 25bps cut.

Despite solid GDP growth (3.0% annualized in Q2) and strong labor market data, the Fed remains cautious, prioritizing inflation containment over stimulus.

Tariffs Add Complexity to Fed's Decision-Making

• New Tariffs Effective August 1: 15% on EU goods, 25% on Indian imports, and 50% on some copper products.

• Powell’s View: Inflation effects from tariffs may be more persistent than previously expected and need to stay aware about repercussion.

The uncertainty around trade policy is directly influencing the Fed’s reluctance to ease, despite mounting political pressure.

Market Reaction: Hawkish Fed Shakes Confidence

• USD Strengthens: DXY hit a two-month high after the decision and press conference.

• Gold Drops: Initial safe-haven demand reversed on Powell's firm tone.

• Equities Slip: DJIA and S&P 500 turned negative as rate cut hopes faded, Tech remained near its highs boosted by the earnings momentum.

Markets are recalibrating: Powell’s press conference removed any short-term dovish tilt, shaking risk assets and boosting the dollar.

DXY Key Chart for Upcoming Macro Trends:

We got a strong ascending, golden cross on the 4 hours time frame. Technically holding above the 99.3 area, we are set to kick off a new emerging trend as long as price remains trading above the EMAs.

Rate Cut Odds Decline Sharpl

• CME Futures: Probability of a September Fed rate cut fell to 45.7%, down from 63.4% pre-FOMC.

• Powell’s Message: No firm guidance for September, emphasizing need for more data.

Investors are now looking ahead to July jobs and inflation data, and the Core PCE print, for cues on whether the Fed might shift by October or December.

Conclusion

Strong focus should be kept on upcoming US Labor data, as they might confirm the start of a new strong uptrend in the Dollar. Stay tuned for our next email shortly before NFP breaking down our expectations.