The dollar index recovered modestly on Thursday, reversing a small part of Wednesday’s post-Fed decline after renewed US military action against Iran added to safe-haven demand overnight.
How Thursday, the week and ultimately July close should provide a clearer indication of what we can expect through August.
Treasury yields, meanwhile, continued to diverge.
The 30-year yield moved above 5.20%, reaching its highest level since 2007, as investors demanded greater compensation for longer-term inflation and policy uncertainty. The two-year yield initially slipped towards 4.22% before recovering,
reflecting a less decisive outlook for the immediate path of interest rates.
The Federal Open Market Committee left its target range unchanged at 3.50%–3.75%, with three officials dissenting in favour of an immediate quarter-point increase.
The result was therefore less a straightforward hold and more a divided decision that revealed growing concern over persistent inflation.
With Fed Chair Kevin Warsh providing no forward guidance and limited indication of what comes next, markets have been left to interpret the data and price the path of monetary policy themselves. That uncertainty could lead to greater volatility across currencies, bonds and equities.
Long-dated Treasury yields rose as investors considered the risk that delaying further tightening could allow inflation to remain elevated for longer. Fed funds futures now price close to a 60% probability of a September rate increase, leaving a meaningful chance that the Fed holds again. That uncertainty may continue to limit any sustained move in short-term yields and the dollar until the incoming data provides greater clarity.
At the same time, Big Tech earnings provided a useful indication of how the market is judging the return on AI spending.
Microsoft exceeded revenue and earnings expectations, while Azure growth accelerated to 43%. The company maintained its underlying spending plan and reported stronger-than-expected free cash flow, helping push the stock higher after the close. The response suggests investors remain willing to support elevated AI expenditure when it is accompanied by visible revenue growth and healthy cash generation.
Meta presented a very different picture. Revenue exceeded expectations, but earnings missed and free cash flow fell 91% from a year earlier to $784 million. The company also raised the lower end of its 2026 capital expenditure range from $125 billion to $130 billion, leaving the upper end unchanged at $145 billion. Shares fell as investors once again questioned whether the scale of spending is being justified by the returns being produced.
Apple and Amazon report after Thursday’s close, providing the next major test of sentiment towards Big Tech and AI investment. Their results could influence whether confidence returns to the technology sector or the current rotation into other areas of the market continues.
This divergence is exactly why we remain selective. The debate around capital expenditure continues to leave semiconductor and AI-related stocks caught between strong long-term demand and growing concerns over valuations, margins and cash flow.
We therefore continue to avoid chasing weakness while sector leadership remains unclear. Our preference is for companies proving they can fund the AI build-out without sacrificing margins, cash generation or the strength of their underlying trends.
Beyond earnings, attention now turns to the next inflation data. Those figures could have a significant influence on expectations for the September Fed meeting, the direction of Treasury yields and whether the dollar can build on its overnight recovery.
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