Insights 
VT 
Since the start of Q3, market sentiment has seen a dramatic turnaround. Compared to the gloomy tone of H1, the third quarter has been filled with bullish surprises. Many asset classes have reached new record highs, and the resolution of tariff uncertainty and a dovish shift from the Fed has led to a rally that shows little sign of slowing. Instead, investors should be looking for the right opportunities within the euphoria.
Tariff Risks Fade, Markets Rebound Sharply
Q3 began with a wave of tariff letters from Trump’s administration. Compared to the slow progress in Q2, Trump’s aggressive pressure tactics forced countries with major trade imbalances with the US to accelerate negotiations. Within a month, most of the top ten deficit countries had reached preliminary trade agreements.
While the terms varied, Trump’s demands were consistent: greater market access for US goods, increased foreign investment in the US, and a united front against China.
Countries meeting these conditions were spared further tariffs. Importantly, most industry-specific tariffs came with “conditional” clauses, and their impact was milder than expected.
This clarity finally closed the curtain on the long-standing tariff drama that had haunted markets since April’s sell-off. As the news stabilised, equities, particularly tech stocks, rebounded strongly, with major indices hitting new highs.
Weak labour data added fuel to the rally, pushing the Federal Reserve to shift its stance and sparking a wave of renewed optimism.
Fed Cuts on Labour Weakness, Not Inflation
July’s Non-Farm Payroll (NFP) numbers fell well below expectations, and previous months’ figures were revised sharply lower. August data continued the trend of weakness. This wasn’t a one-off. In early September, the Bureau of Labor Statistics revised down an entire year’s worth of job growth by an average of 76,000 jobs per month, further cementing expectations for Fed rate cuts.
At Jackson Hole, Fed Chair Powell struck a dovish tone, reinforcing the view that the Fed is pivoting toward easing.
Ahead of the September FOMC decision, markets had priced in a total of 75bps in rate cuts for the rest of the year. Ultimately, the Fed delivered a 25bps cut, bringing the benchmark rate to 4.00–4.25%.
What made headlines was Trump’s latest move: in early August, Fed Governor Kugler resigned, allowing Trump to appoint a dovish ally, Miran, to the Board. Though concerns were raised about Fed independence, markets took the move in stride.
Miran voted for a 50bps cut, making him the only dissenter in favour of an even deeper cut. If Trump continues appointing loyalists, the Fed could lean more dovish in the future but for now, no further action seems necessary.
The latest dot plot showed a meaningful dovish shift compared to June. While support for three cuts this year fell short of a majority, it still represented a strong voting bloc (9 members).
Expectations for 2025 moved towards multiple cuts, suggesting the Fed remains cautious and is aiming for balance between inflation control and employment support.
Statement Shift: Labour Weakness in Focus
The Fed’s statement was noticeably changed. References to net export volatility were removed. The description of a “strong labour market” was revised to “slowing job growth” and “rising unemployment.” This signalled that the Fed is more concerned about softening labour conditions than rising inflation.
Although inflation has remained sticky, the Fed’s language changed from “increasing inflation” to “elevated and persistent.” Powell downplayed tariff-related inflation concerns, stating that their impact was smaller than expected.
In the updated Summary of Economic Projections (SEP), GDP forecasts for 2024 and 2025 were revised upward, while unemployment and inflation projections remained stable. This suggests that the Fed sees limited downside risk under a looser policy.
Powell called the rate cut a “precautionary” move framed as a risk management strategy and hinted that further cuts may follow in the remaining two meetings of the year. Even as asset prices climb, and concerns of overheating emerge, the market is still underpinned by a strong easing bias.
Q4 Outlook: Opportunities and Risks Ahead
Looking to Q4, the Fed is expected to continue easing, but several factors warrant caution. Many other central banks have paused or slowed their own rate-cut cycles.
The ECB, for example, may still cut once in Q4, but with inflation still above target and growth slowing, it may adopt a more cautious tone. The Bank of England is in a similar position, and sticky inflation may keep rates on hold.
This divergence in policy paths could further weaken the USD, particularly as the Fed presses ahead with interest rate cuts. Meanwhile, although tariff tensions have eased, the pause in US-China tariff negotiations is set to expire on November 10. Whether this agreement will be extended or renegotiated remains to be seen.
Markets are currently in an exuberant mood, and this optimism may carry through Q4. However, unexpected data releases or event risks should not be overlooked.
Investors would do well to stay focused on high-momentum assets like gold, US tech stocks, and cryptocurrencies, while looking for favourable entry points as volatility emerges.
Actionable Insights: What This Means for Traders
The Fed’s easing bias and fading trade tensions are supporting risk assets, but divergence in global monetary policy could introduce new FX opportunities.
A weaker USD driven by Fed rate cuts and continued easing could offer upside potential for EURUSD and GBPUSD, particularly if the ECB and BoE remain cautious.
Watch for EURUSD retesting the 1.10–1.12 region and GBPUSD potentially reclaiming the 1.28–1.30 zone if US data remains soft and rate differentials narrow further.
For commodities, a supportive backdrop for gold remains in play.
The Fed’s precautionary stance and rising global reserve demand for gold reinforce the case for $$3,700-3,800 targets by year-end.
Crypto, too, stands to benefit. Fed dovishness and a weaker dollar could attract capital back into digital assets, particularly if macro volatility stays contained.
