The US dollar rose against the G10 currencies and most emerging market currencies last week. But to the extent the upside correction this month has been spurred by a backing up of US rates, its recovery may be over or nearly so. The US two-year yield settled lower on the week and the 10-year yield saw its gains pared to less than three basis points after the 4.50% level held. The greenback was sold aggressively in the middle of the week amid heightened speculation, spurred in part by the White House itself that the president was on the verge of firing Fed Chair Powell. The dramatic market response may have encouraged official assurances that the dismissal was not going to take place, and the dollar and equities recovered. Federal Reserve Governor Waller, a rumored candidate to succeed Powell, though not considered the front-runner, continued to argue for a rate cut later this month. He does not appear to have convinced even a few of his colleagues of the merit of doing so. Still, the odds of a September cut have reduced to about 63%, near the lowest of the year, and Waller's comments may mark put a floor.
The week ahead features the flash July PMI, the ECB meeting and Tokyo's July CPI. The PMI poses headline rise. There is virtually no question about the outcome of the ECB meeting. It is on hold until at least Q4. The Tokyo CPI is expected to tick lower. The headline rate has not risen since April, and it could be the first back-to-back decline in the core rate of the year. We do not expect the upper house election results to have much market impact. The wild card, so to speak, is the White House and its tariff letters. The Trump administration has used tariffs not only to settle what it thinks are trade grievances but also to force Colombia to accept Colombians it was deporting and to object to Brazil's judicial treatment of former President Bolsonaro. Since US import prices do not include the tariffs, their flatness suggests foreign producers have not cut prices to absorb the levies. The prohibitive tariff (~160% all told) announced on graphite imports from China risk slowing the US development of an EV battery industry.
US
Drivers: The dollar dropped precipitously when there were heightened fears that President Trump was going to fire Fed Chair Powell. That mini crisis seems to have passed, but the underlying upside correction in the dollar may be ending. We see the dollar's correction has been helped by the rise in US rates. The year-end Fed funds effective rate is now seen near 3.90%, the highest in five months. The odds of a September cut have fallen to the lowest of the year in the Fed funds futures market. And as we note below, the 30-day correlation of changes in the dollar-yen exchange rate and the US 10-year yield is the highest it has been since 2021.
Data: There are high-frequency data reports nearly every day in the week ahead, but most of them are surveys, which the Federal Reserve has played down. Q2 GDP will be officially released on July 30, a few hours before the FOMC meeting concludes. The median forecast in Bloomberg's survey is that the US economy expanded by 2.1% at an annualized pace in Q2. The Atlanta Fed GDP tracker sees it closer at 2.4%. Bloomberg's growth data surprise model turned higher last week after probing its lowest level since last August in the previous week.
Prices: The Dollar Index reached 98.95 last week as the recovery from the three-year low set July 1 near 96.35 was extended. Governor Waller's call for a rate cut may not raise to the level of dissent, but it could very well mark the end of the upside correction in short-term US rates, and an end to the correction. The first confirmation of this may be a break of the 97.65-70 area.
EMU
Drivers: The ECB meets on July 24, but there is practically no chance of a change in policy. Moreover, ECB President Lagarde's forward guidance is likely to be minimal. At this juncture, a rate cut at the next meeting (September) also looks unlikely. Since the end of June, the US two-year premium over Germany has risen by almost 20 bp.
Data: There is a vibe that the eurozone is finding traction, but you wouldn't know if by the look at forecasts for Q2 GDP, which will also be reported on July 30. The PMI composite Q2 average was slightly above the Q1 average. Yet the median forecast in Bloomberg's survey is that the economy in stagnated in Q2 after growing by 0.6% quarter-over-quarter in Q1.
Prices: The current downside correction in the euro is the fourth this year that has lasted more than a week. The average pullback in the past three corrections was about 3.4% (range ~2.1%-4.4%). This one is around 2.3%. Provided the $1.1555 holds, the outlook may be constructive. A move above $1.1660 may help stabilize the tone, and overcoming the $1.1720-25 area will boost confidence that a low is in place.
PRC
Drivers: The PBOC is managing a gradual appreciation of the yuan against the dollar. It seems minor and inconsequential in terms of magnitude (~1.7% year-to-date). It continues to closely track the greenback.
Data: Chinese banks set the loan prime rates, but they are not expected to change (3% one-year and 3.50% five-year). China will report the banks' June FX settlement with customers, not other banks. In a given month, Chinese banks trade trillions of yuan (hundreds of billions of dollars). As one might expect, especially given the dollar's weakness, the banks' clients are net buyers of yuan. And indeed, they were buyers in the three months through May and were net sellers of yuan in the previous three months.
Prices: Since early June, the dollar has been traded in a range of almost CNH7.15 to CNH7.20. This range looks set to prevail for a bit longer. While the US dollar has corrected higher against most currencies this month, the yuan has been resilient. It has fallen less than 0.2% against the greenback, outperforming all the G10 currencies in the period, and most emerging market currencies. This underscores our understanding that Beijing does not want a strong or weak yuan but a yuan that is broadly stable against the US dollar.
Japan
Drivers: The governing coalition, the Liberal Democratic Party and Komeito, lost the majority in the lower house of the Diet last year and may lose it in the upper house in the July 20 election. The results will be known before the markets open on Monday. The outcome may not have much market impact as policy continuity is the most likely scenario. However, a poor showing could see Prime Minister Ishiba challenged within the LDP later this year. Meanwhile, the rolling 30-day correlation of changes in the dollar-yen exchange rate and the 10-year US yield has risen to around 0.80, the highest since the end of 2021.
Data: The markets do not pay much attention to Japan's PMI. The preliminary July estimate will be reported early July 24. The composite in June was 51.5, a three-month high. The Tokyo CPI the following day is arguably more important given it gives good insight into the national figure that will be reported in a few weeks. Headline CPI was 3.1% in June, the same as in December 2024, though that masks some volatility (2.8%-3.4%). The core rate (excluding fresh food) and the measure that excludes fresh food and energy also rose 3.1% year-over-year in June. The headline and core rates are expected to tick lower for the second consecutive month.
Prices: Last Wednesday, amid the flurry around President Trump's threats to fire Fed Chair Powell, the dollar traded in a broad range against the Japanese yen (~JPY146.90 and JPY149.20). It remained in that range in the last two sessions. We note that the US 10-year yield peaked near 4.50% last Wednesday, as well. The greenback rose a little more than 4.5% from the July 1 low and stalled in front of the 200-day moving average (~JPY149.70), which it has not traded above in five months. The move in the US 10-year yield stalled again near 4.50% last week, and if it holds, it boosts the chances that the break from last Wednesday's range will likely be to the downside.
UK
Drivers: The rolling 30-day correlation of changes in sterling and the Dollar Index is around -0.76. It is off the extreme from about a month ago (~-0.90) but still is robust. Sterling has shown itself to also be sensitive to the monetary/fiscal problems that are looming. The economy appears weaker than expected. A slowing from the heady 0.7% pace in Q1 was well anticipated but the labor market is slowing, manufacturing output has fallen for three months in a row through May, and cumulatively the index of service activity is little better than flat this year. The BOE has signaled gradualism, and the market is discounting two cuts in the remainder of the year. The weaker the growth the more challenging the government is going to find keeping both its tax pledge and its fiscal rule commitment.
Data: The UK sees Rightmove house price index. It fell by 0.3% in June, the first monthly decline of the year, which trimmed the year-over-year gain to 0.8%. The base effect is favorable in July as last July’s decline of 0.4% drops out of the 12-month comparison. The government's June budget will be scrutinized given the fiscal concerns. The flash PMI will attract some attention, but it recovered to 50.3 in May from a fluke 48.5 in April (first read below 50 since October 2023) and rose to 52.0 in June. The July 25 June retail sales report may be the most important data point of the week. Retail sales, reported in volume terms, collapsed by 2.7% in May after a 1.3% increase in April. Another decline or even a small uptick may weigh on sentiment. It may be for supportive of the short end of the Gilt curve while fiscal issues are expressed as supply issues.
Prices: Sterling may have forged a bottom in the $1.3365-75 area in recent days. A move above $1.3485 will help stabilize the technical tone, while overcoming the $1.3525-30 area will bolster the chances that the downside correction is complete. The momentum indicators are over-extended, and sterling has absorbed a string of poor economic data.
Canada
Drivers: The Canadian dollar exchange rate continues to appear to be largely a function of the broad movement of the US dollar. The rolling 30-day correlation was below 0.20 in early February between the changes in the CAD-USD exchange rate and the Dollar Index. It has held above 0.60 since late April and it is closer 0.70 now.
Data: There are two highlights in the coming days. The first is the Bank of Canada's Q2 business survey. It was conducted in May. May full-time job growth (57.7k), the most so far this year, and biggest jump in the composite PMI since March 2022 (though still below the 50 boom/bust level) may have been favorable for sentiment, and optimism of the early days of the new government also seems supportive. However, the disruption emanating from the US is serious, as we have subsequently learned, likely limiting the market impact of the survey results. Canada also reports May retail sales. In April, auto sales flattered the headline (0.3%), without which Canada's retail sales would have fallen by 0.3%. Seasonally adjusted annualized sales showed a small decline in May, but in terms of raw units, they were relatively stable.
Prices: The US dollar rose about 1.6% against the Canadian dollar since the July 3 low near CAD1.3555. It reached almost CAD1.3775 last week, ahead of important chart area around CAD1.38. A shelf was formed in recent days near CAD1.3670-80. A break of CAD1.3640 would suggest the greenback's upside correction is over.
Australia
Drivers: The rolling 30-day correlation of changes in the Australian dollar and Dollar Index tested this year's extreme (-0.80) in early July but has since eased to about -0.63. The inverse correlation with changes in the Canadian dollar has tightened to around -0.70, a two-month high, from around -0.50 in late May. The 30-day correlation of changes in the exchange rate and copper reached a four-year peak in mid-June (~0.83) but it has eased back toward the middle of this year's range (~0.40). The Aussie's correlation with gold over the past 30 days is slightly inverse, down from a 12-month high near 0.70 around mid-April.
Data: Minutes from the central bank meeting that surprised the market by standing pat will be released early on July 22. The futures market is confident that as Governor Bullock noted, the issue was about timing not the direction of policy and is discounting a quarter-point cut next month and another cut in Q4. The preliminary July PMI will be reported. The composite stood at 51.6 in June, matching the year's high (March) and the highest since last August. However, the manufacturing PMI fell three months through June (though the Q2 average of 51.1 was above the Q1 average of 51.9 and was the highest quarterly average since Q4 22).
Prices: Last Thursday, the Australian dollar fell to about $0.6455, which overshot by a few hundredths of a cent the (61.8%) retracement of the rally from the June 23 low (~$0.6375). It recovered on the back of a broadly lower US dollar ahead of the weekend to nearly $0.6450. Still, it closed lower on the week (~0.60%) for the first time in four weeks. The price action is constructive, but the caveat is that the pullback was brief, and the momentum indicators remain over-extended.
Mexico
Drivers: The peso remains a favorite long against the US dollar. The yield pick-up is attractive and the peso's liquidity and modest volatility are integral to the story. It is also a "risk currency” the USD-MXN exchange rate is inversely correlated with changes in the S&P 500 (-0.44). After a strong run through H1, the peso has spent the first half of the month consolidating.
Data: Mexico reports May retail sales. The 1.0% decline in April nearly offset the cumulative 1.1% rise in Q1 25. A weak report will add to fears weaker economic times. However, the central bank has reduced the restrictiveness of monetary policy and real interest rates have softened. The IGAE monthly economic indicator is like a monthly GDP report and began Q2 on a firm note (0.54 after -0.18 in March). The first half of July CPI reading will be reported on July 24. Inflation readings remain elevated, and the central bank has signaled a slower pace of rate cuts going forward after four half-point cuts.
Prices: The US dollar rose to around MXN18.8850 last Tuesday, surpassing slightly the (38.2%) of the leg down since June 23. It has spent the last three sessions in the range set that day (low was ~MXN18.65). The low for the year was set July 9 near MXN18.5525. The momentum indicators are still moving higher, but the inability of the greenback to establish a foothold above the 20-day moving average on a settlement basis (now ~MXN18.76) suggests it remains fragile.
Reviewed by Marc Chandler
on
July 19, 2025
Rating:
