It seems clear that the July jobs data was an important turning point. The two dovish governor dissents from the FOMC's decision to standpat, citing not economic strength like the White House, but recognizing the weakness in the labor market, were not outliers as much as the proverbial canaries in a coal mine. The market had recognized the strong chance of a rate cut next month and at least two before the end of the year before President Trump indicated he would nominate Stephen Morin to complete Kruger's term on the Federal Reserve Board.
The dollar's counter-trend rally in July ended as well. Follow-through selling in recent days has seen the dollar meet technical retracement targets of last month's bounce. With US interest rates still at the lower end of their ranges, despite a soft reception at the US refunding last week, we suspect the market is vulnerable to what may prove to be the third consecutive monthly increase in the year-over-year headline and core CPI. After the report, we suspect the dollar's downtrend can resume. The other highlight next week will likely be a quarter-point rate cut by the Reserve Bank of Australia. It will be the third cut in the cycle. In the last three meetings of the year, the futures market has Q4 cut and about a 50% chance of another cut discounted. The Reserve Bank of New Zealand meets on August 20 and is expected to cut by a quarter-point. Norway's Norges Bank meets on August 14. Although its easing cycle is not over, it will likely wait until September to deliver the next cut.
US
Drivers: The July dollar rally, encouraged by stronger economic data and a Fed that seemed to be in no hurry to resume its easing cycle, was snapped by the poor jobs report, weak ISM, and a shift not only to a Fed cut in September but around a 33% chance of three cuts this year, discounted in the Fed funds futures market, The Federal Reserve most likely resume its easing cycle before Stephen Miran is confirmed to fill the rest of Governor Kugler's term on the Federal Reserve Board. The dismal of the BLS commissioner raises the question of the integrity of the data more than issues related to the substantial revisions.
Data: Four high frequency reports this week stand out. First is the July CPI. It is expected to come in firmer at 2.8% (from 2.7%) for the headline and 3.0% (from 2.9%) for the core. It would be the third consecutive increase in the headline and core rates. This may see the market re-think about the likelihood of a third cut this year. Second, strong auto sales will likely flatter retail sales. Excluding autos, retail sales may have edged up by 0.3% after rising 0.5% in June. Third, import and export prices will be reported at the same time as retail sales at the end of the week. Remember import prices do not include tariffs. If they do not fall, it is a sign that either US companies and/or consumers are paying the levy, not foreign producer profit margins. Fourth, the median forecast in Bloomberg's survey is for a 0.2% decline in last month's industrial output. It would be the second contraction in three months and the fourth of the year. Separately, but not totally unrelated, in the 12 months through July, the US lost 108k manufacturing jobs and 37k in the past three months. Manufacturing output was virtually flat in Q2 and in the year through June was up about 1.2%.
Prices: Follow-through dollar selling last week saw the Dollar Index approach the (61.8%) retracement of last month's rally found near 97.85. The line connecting the two July lows is near 97.70 at the end of next week. Momentum indicators have turned down and the five-day moving average is poised to fall through the 20-day moving average in the coming days. Assuming July was an overdue upside US dollar correction, the downtrend looks set to resume, though the CPI may give a lower risk entry opportunity.
EMU
Drivers: The key consideration that seemed to put the bottom in the euro after falling from early July was the shift in expectations for the Federal Reserve following the US data. This was reflected in the narrowing of the US two-year premium over Germany. It recent peak was near 208 bp in early July. It fell to nearly 175 bp after the US jobs, the least since early April and consolidated in recent days, straddling the 180-bp level.
Data: With the second look at Q2 GDP, more details will be provided. Given the dismal German industrial output and export figures for June, there is some risk of a small reduction in the revision. It will be reported at the same time on Thursday as the aggregate June industrial production report. Separately, Germany's August ZEW survey will be released on Tuesday, August 12. The assessment of the current situation improved in six of the past seven months, but at -59.5 in July it is still sobering. The expectations component stood at 52.7 in July, up from 15.7 at the end of last year, and the highest since February 2022, when Russia invaded Ukraine.
Prices: The euro recouped (61.8%) of its losses since the July 1 high last week. It reached almost $1.17, and the retracement objective was closer to $1.1660. The August 1 high after the US jobs data was almost $1.1600. The June-July trend line is near $1.1750 at the end of the week ahead. The momentum indicators have turned up and the five-day moving average looks poised to move back above the 20-day moving average. Last week's low was slightly above $1.1525. A break of this would undermine the technical tone.
PRC
Drivers: Beijing seems to be accepting a somewhat firmer yuan. In the context of most of the G10 currencies, the movement is minor. The dollar rose slightly more than 0.5% against the yuan in July, making the yuan one of the strongest currencies in the world last month. We continue to monitor wider day-to-day changes of the dollar fix, while the implied vol has eased. A broader setback in the dollar may see the PBOC's patience tested.
Data: Aggregate lending has risen by more than a quarter this year, flattered by government borrowing, and it looks to have remained strong in July. China's slew of real sector data will be reported at the end of the week, including retail sales (likely improved) and industrial production (softer). Despite various attempts to stabilize the property market, house prices (new and used) look soft. Sales and investment in the sector continue to contract.
Prices: Beijing continues to keep the yuan broadly stable against the dollar. It resists what it may see as another effort by the US to gain competitive advantage by spinning it so that other countries need to appreciate their currencies rather than weaken the overvalued dollar. A shelf has been forged near CNH7.1765-80 last week. If this yields, the CNH7.15 area is the next area of support. On the topside, the CNH7.1950-CNH7.2000 looks like the first hurdle, but the high before the US jobs data on August 1 was near CNH7.2240.
Japan
Drivers: We continue to track the robust correlation of changes in the US 10-year yield and the dollar-yen exchange rate. The rolling 30-day correlation, near 0.80, is at the upper end of where it has been for years. The rolling 60-day correlation is near 0.55. It was below 0.20 in early July. The correlation of changes in the exchange rate and Japan's 10-year yield is and less than 0.10 on the rolling 30-day basis and is slightly inverted over the past 60-sessions.
Data: The highlight of the week is Japan's Q2 GDP. After contracting by 0.2% at an annualized rate in Q1, the Japanese economy is thought to have expanded by around 0.3% in Q2. A recovery in government spending and improved net exports may offset slower consumption and business investment.
Prices: The dollar was confined to a range last week against the yen: ~JPY146.60-JPY148.10. Our initial bias for a stronger greenback in the first part of the week ahead. US rates are near the lower end of their range and could firm if the US CPI rises for the third consecutive month. The JPY148.25 area is the (38.2%) retracement of the dollar's drop from the JPY150.90 area seen before the August 1 US jobs reports. The next retracement (50%) is around JPY148.75.
UK
Drivers: After last week's rate cut, but cautionary forward guidance, market speculation of a cut in Q4 was pared. The odds were pared from 100% to about 70%. Sterling remains sensitive to the broader movement in the dollar. The inverse correlation with the changes in the Dollar Index continues to hover around -0.70 over the past 30 sessions and -0.80 over the past 60 sessions. The 30-day correlation reached an extreme near -0.90 in mid-June, the most since April 2024. The 30-day correlation with the euro, which is the largest component in the Dollar Index, is near 0.70 and the 60-day correlation is closer to 0.77.
Data: A new labor market report is due Tuesday and Q2 GDP on Thursday (with June details). Recall that the monthly GDP contracted in April (-0.3%) and May (-0.1%). Before the BOE meets again on September 18, two monthly CPI reports, another labor market report, and July GDP will be in hand. The bar to back-to-back rate cuts looks high.
Prices: Sterling's recovery from the $1.3140 area before the US jobs report faded ahead of a key technical area near $1.3465. It is the (50%) retracement of sterling's decline from the July 1 high around $1.3790 and the where the trendline off the two highs last month was found at the end of last week. Initial support is seen in the $1.3355-75 area. The momentum indicators have turned up and the five-day moving average is poised to cross above the 20-day moving average for the first time in a month, contributing to the constructive technical tone.
Canada
Drivers: The Canadian dollar continues to be sensitive to the overall movement of the US dollar. The rolling 30-day correlation slipped below 0.20 in early February and resurfaced above 0.60 in April. It has been moving between around 0.60 and 0.80 over the last few months and is near 0.75 now. The rolling 60-day correlation is near 0.75, the highest since last July. In the first half of the year, as the greenback was sold aggressively, the Canadian dollar was the weakest in the G10 with a 5.5% gain. In July, the US dollar enjoyed its first monthly advance during President Trump's second term, and the Canadian dollar was the best performer in the G10, losing 1.8%. This fits the pattern we observe, that in a weak US dollar environment, the Canadian dollar lags, and in a firm USD environment, the Canadian dollar performs better.
Data: Second tier economic data will not distract the exchange rate from the US dollar focus. The Bank of Canada does not meet until September 17. After the disappointing jobs report (loss of 51k jobs, the most since March), the swaps market perceived a greater chance of another cut this year. The odds of a cut next month rose to almost 45% (from about 25% on August 1). A cut is fully discounted by the end of the year for the first time in a month.
Prices: The US dollar extended its losses last week after posting a key downside reversal on August 1 in response to the poor US jobs data. After peaking then near CAD1.3880, the greenback retreated to almost CAD1.3720 last week. That corresponds to the (50%) retracement of the US dollar's rally starting from the July 23 low (~CAD1.3576) and the 20-day moving average. Despite the surprising sharp loss of full-time positions in Canada, ahead of the weekend, an inside day was recorded. The momentum indicators have turned down. Additional greenback gains ahead of the US CPI report could see it approach CAD1.3800, could provide an opportunity to sell US dollars.
Australia
Drivers: The Australian dollar is highly sensitive to the US dollar's broad direction. The 30-day inverse correlation of changes in the Australian dollar's exchange rate and the Dollar Index reached a new extreme for the year near -0.80 on August 1. It is the most extreme since mid-2024 and is now near 0.76. The rolling 60-day correlation is a little around -0.75, also the most extreme since mid-2024. The correlation between the US two-year yield and the exchange rate was positive from late February through last May, but it is inverse again (~-0.28), near most in almost four months. Changes in the Australian dollar and Canadian dollar have a nearly 0.80 correlation over the past 30 sessions and almost 0.70 over the past 60 sessions, supporting ideas of a dollar bloc.
Data: Although the markets were disappointed last month when the Reserve Bank of Australia stood pat, it is confident of a quarter-point cut at the August 12 meeting. That will bring the cash rate target to 3.60%. The futures market is discounted another cut fully in Q4 and around a 60% chance of another. Early on August 14, Australia reports on the labor market in July. Australia created a little less than half as many jobs in H1 25 as in H1 24 (90.6k vs. 201k). Of those jobs, 61.2k were full-time positions compared with 167.4k in H1 24. The unemployment rate stood at 4.3% in June, up from 4.0% in June 2024. The increase in the unemployment rate can be traced to the rise in the participation rate--from 66.8% in June 2024 to 67.1% in June 2025.
Prices: The Australian dollar reached almost $0.6495 after the US jobs data on August 1 and extended its gains to $0.6540 on August 7 before consolidating ahead of the weekend. The $0.6545 area is where the (61.8%) retracement of the leg lower from the year's high set on July 24 (~$0.6625). Support is seen in the $0.6480 area. The momentum indicators are turning higher, and we suspect the high for the year is not in place.
Mexico
Drivers: The extension of the US-Mexico trade talks was not much of a market factor. The dollar's broad gains in July, saw the peso snap a six-month advance against the greenback. The attractive carry still makes it an attractive long against the US dollar. As widely expected, the central bank cut its cash rate target 25 bp to 7.75%. The prospects for a resumption of the Fed's easing cycle suggest the rate differential may begin widening again.
Data: The highlight this week is the June industrial production. Given that central bank does not meet again until September 25, the report will likely have little implications for policy. That said, the economy expanded by 0.7% in Q2 after a 0.2% expansion in Q1. The early forecast for Q3 is for a small contraction. Consumption, investment, and government spending are expected to have fallen. Net exports look weaker, as well.
Prices: The dollar reached its highest level since June 25 on August 1 slightly above MXN18.98. Ahead of the weekend, the greenback sank to MXN18.5460. The year's low, set late July, was near MXN18.51. The momentum indicators have turned lower, and the five-day moving average is back below the 20-day moving average. We have suggested that below MXN18.50 and the next technical target may be near MXN18.40. Potential before the end of the year may extend toward MXN18.15-MXN18.20.
Reviewed by Marc Chandler
on
August 09, 2025
Rating:
