Currencies: Tariffs, Act II

Equity markets are consolidating as leadership shifts. The dollar is holding firm because the Fed has yet to pivot. The yen is wavering as global stress fails to take root. However, slowing disinflation and rotating capital flows signal one thing: the second half of the cycle will be more selective, more international, and less concentrated on U.S. mega-caps. In other words, the cycle is not reversing; it is transforming.

The macroeconomic sequence of the past week has clarified one essential point: we are not on the brink of a recession, but we are no longer in a phase of euphoric expansion. The cycle is slowing, disinflation is pausing, and the global rotation of flows is becoming the primary market driver.

For several months, the market operated under a simple scenario: solid growth, receding inflation, and two rate cuts starting in June. The PCE data has complicated this equation. While most inflation indicators pointed toward a gradual return to 2%, the Fed's preferred barometer surprised to the upside. Not an explosion. Not a return of rampant inflation. But enough to break the linearity of the narrative. This changes everything. The Fed no longer feels an urgency to act. U.S. real rates remain high. The market is beginning to price in the possibility that the first cut could come later — or even be the only one.

While investors scrutinize the Fed, the structural transformation is happening elsewhere. Flows are progressively exiting U.S. mega-caps to redeploy toward:

• small & mid caps,
• value stocks,
• international markets,
• emerging markets.

Thus, we are witnessing a reshuffling of the deck, not the formation of a market top. As for the legal ruling on tariffs, it does not extinguish trade uncertainty. Iran–U.S. tensions are maintaining an energy risk premium. The trade deficit remains massive despite customs barriers. Political noise is preventing a sustained compression of volatility. The dollar is not rising for structural reasons. It is rising partly out of reflex and because the Fed is not cutting. This is a major nuance.

Technically, the 96.48 level on the Dollar Index is still holding firm, but 98.00 is struggling to be clearly breached. The scenario of a greenback rebound therefore remains fragile. In parallel, we will monitor resistance at 1.1920/60 on EURUSD to preserve the scenario of a consolidation toward 1.1573 in the first instance. A break below 1.1730, the counterpart to 98.00 on the DXY, should strengthen the bearish conviction.