We had adopted a working hypothesis that the after recording lows in early July that the greenback was going to retrace the last leg down that began around June 23. That appeared to run its course around July 17. We anticipated last week's pullback. However, the price action warns that the dollar's upside correction may not be over.
The challenge is that next week is among the busiest of the year. Three G7 central banks meet--the Federal Reserve, the Bank of Japan, and the Bank of Canada. The US and the eurozone release their first estimates of Q2 GDP. The eurozone also reports its preliminary estimate of July CPI and the US sees its PCE deflator. The week begins with US President Trump meeting with EC President von der Leyen on on Sunday to possible finalize a trade agreement and finishes on Friday, August 1, with the US July jobs report, and ostensibly the end of the postponement of the US "reciprocal tariffs." Top US and Chinese officials meet at the start of the new week in Stockholm and the US seems interested in extended the tariff truce for another 90-days (from August 12). A Federal Reserve that indicates it may be getting closer to resuming its easing cycle and the continued slowing of the US labor market may be difficult to reconcile with the constructive technical outlook.
US
Drivers: There is not a one-to-one correspondence between change in US interest rates and the dollar, and sometimes other factors overwhelm the interest rate impulse. However, currently we understand the greenback to be sensitive broadly to shifts in expectations for Fed policy, while the exchange rate against the yen appears more sensitive to movement of the 10-year US yield.
Data: This is one of the busiest weeks of the year for US macro. The US reports June trade figures, and the H1 shortfall looks to about 30% larger than H1 24, partly flattered by trying to front-run US tariffs. The US also sees the first estimate of Q2 GDP, which may be the last where the annualized rate is above 2.0% for several quarters. Personal income and consumption data are due, and, given the recent CPI and PPI figures, the deflators are likely to have risen. However, the market will be more sensitive to the non-farm payroll figures at the end of the week, where job growth is expected to have slowed (~100k) and the risk is that the unemployment rate ticked up. The FOMC meets but is not going to do anything. Governor Waller, the former head of research at the St. Louis Fed, has suggested he may dissent in favor a rate. He has expressed concern that the labor market is deteriorating more than it may appear, but after initial jobless claims fell for the fifth week in a row, his concern may not rise to the level of dissent. Still, a dissent by another governor (Bowman) is also possible, and while one governor dissent is rare, two would make the decision appear as a dovish hold. Note that the appellate arguments to the international trade court finding that the tariffs implemented under the International Emergency Economic Powers Act (IEEPA) of 1977 are illegal. Regardless of the outcome, the we imagine it will be appealed up to the Supreme Court. The US Treasury will announce its quarterly refunding plans as it sells $183 bln in coupons (not counting the two-year floating rate note) and a greater amount of bills.
Prices: We correctly anticipated the bounce in the Dollar Index in the first half of July and caught the recent pullback. However, after trending lower since mid-January, the dollar's upside correction may be more complicated than we initially assumed. A move above the 98.00-98.25 band would suggest a retest on the month's high near 99.00, and possibly the 99.40-60 area. This would likely be accompanied by rising US rates.
EMU
Drivers: The European Central Bank stood pat last week and gave the market no encouragement to anticipate another cut any time soon. In fact, the swaps market does not have another cut fully discounted for this year but still sees around 64% probability of a cut in December. Europe seemed willing to accept some universal tariff from the US, but like appeasement of Russia, its acquiescence seems to have encouraged the Washington harden its demands.
Data: Two data points stand out, and they may send conflicting signals. Wednesday sees the first estimate of the aggregate eurozone Q2 GDP. After expanding by 0.6% quarter-over-quarter in Q1, the median forecast in Bloomberg's monthly survey anticipates a small contraction in Q2, while the weekly survey sees a flat quarter. On the other hand, at the end of the week, the preliminary July CPI is reported and given the base effect (flat in July 2024), the risk is the year-over-year rate increased for the second consecutive month and resurfaced above 2.0% for the first time since April.
Prices: The euro stalled last week near $1.1790, stopping short of the nearly four-year high set July 1 (~$1.1830). The risk is that the downside correction is not over. A break of $1.1650 would support such a view, and warn of risk toward $1.1540-50, and possibly $1.1450.
PRC
Drivers: The key driver of the yuan's exchange rate is the broad direction of the dollar. Beijing will not allow the US to depreciate the dollar and gain competitive advantage the way it thinks the US did to Europe and Japan in the 1980s. Still, the PBOC has introduced a modicum of more flexibility in setting the dollar's daily reference rate. Note the Sino-American trade truce is currently set to end on August 12, though negotiations at the beginning of next week in Stockholm may result in a 90-day extension.
Data: Owing to the close management of the exchange rate, the economic data tends not to have much impact. Still, on July 31, Chinese reports the July PMI. The composite has edged up for the past two months and stood at 50.7 in June. It has not risen for three consecutive months since Q1 23. Beijing estimated that the economy expanded by 1.1% quarter-over-quarter in Q2 and 1.2% in Q1. The median forecast in Bloomberg's survey sees growth slipping below 1.0% here in Q3.
Prices: Last Thursday's dollar slump to a new low for the year near CNH7.1440, likely marks the near-term extreme. The recovery ahead of the weekend reached a little through CNH7.17. Above CNH7.1730 there is little to stand in the way of CNH7.19, provide the dollar remains firm. The greenback has not traded above CNH7.20 since June 11. The absolute value of the changes in the PBOC dollar fix was 0.27% last week. Small beer, but most in a week since late May. Critics of China's exchange rate policy seem concerned about the pace of the yuan's appreciation not the direction. Since the end of April, the yuan has risen in all but three weeks against the dollar.
Japan
Drivers: We continue to track the robust rolling 30-day correlation of changes in the exchange rate and the 10-year US yield. The correlation with the exchange rate is stronger than Japanese yields or even the interest rate differentials.
Data: Japan reports June retail sales and industrial production figures. Both fell in May, and industrial output also fell in April. Japan reports June housing starts and employment, which typically have little market impact. The highlight of the week is the Bank of Japan meeting that concludes Thursday. There is practically no chance of a change instance. It will update its economic forecasts. The Japanese economy contracted in Q1, and the uncertainty around US tariffs is palpable, but the direction of impact is unfavorable. The swaps market is pricing in more than 20 bp of tightening by year end for the first time since April. Details of the US trade deal with Japan have not been published especially about the most innovative feature, the $550 bln direct investment pledge, which is equivalent to around 14% of Japan's GDP. Direct investment last year from Japan, including retained earnings was about $54 bln.
Prices: The dollar recovered from the July 1 low near JPY142.70 and reached nearly JPY149.20 on July 16. Last week's pullback overshot slightly the (50%) retracement of the recovery (~JPY145.95). However, helped, we would argue, by the rise in the US 10-year yield, the greenback reached almost JPY148 ahead of the weekend to meet the (61.8%) retracement of the pullback. With an eye toward higher US rates, we suspect there may be potential for the US dollar to test its recent highs. The 200-day moving average is near JPY149.65, and the dollar has not traded above it since mid-February.
UK
Drivers: Sterling remains sensitive to the broad direction of the dollar. The rolling 30-day correlation between changes in sterling and the Dollar Index is around -0.75. This is slightly more than correlation with the euro (0.73), the largest component of the Dollar Index. It is roughly as sensitive to the changes in the US two-year yield as it is to changes to the UK two-year Gilt yield (~0.36). The Labour government faces difficult fiscal choices, but it does not seem like an immediate market driver.
Data: The market is not typically sensitive to the upcoming data, which consists of consumer credit and mortgage lending data. The UK economy grew by 0.7% quarter-over-quarter in Q1 to lead the G7, but growth evaporated in Q2. The monthly GDP contracted in April and May.
Prices: The string of disappointing UK data revealed sterling's vulnerability. It was the weakest of the G10 currencies last week, with a nearly flat performance. Recall that fell from the multi-year high on July 1 around $1.3790 to a two-month low on July 16 near $1.3365. The subsequent recovery hit a wall on July 24 by $1.3590, which was slightly more than the (50%) retracement of the leg down from July 1. The $1.3365-70 area may be the neckline of a possible head and shoulders top pattern. A convincing break of the neckline has a measuring objective is around $1.2940. The (50%) retracement of this year’s rally is near there and the 200-day moving average is a little above there (~ $1.2970).
Canada
Drivers: The broad movement of the US dollar, reflected in the Dollar Index continues to be the single most important driver of the Canadian dollar's exchange rate. The rolling 30-day correlation of changes in the USD-CAD exchange rate and the Dollar Index is slightly below 0.77. Many observers insist that the Canadian dollar is a petro-currency, but the 30-day correlation is around 0.20. The sign is important here: Over the last couple of months, the US dollar tends to appreciate against the Canadian dollar when oil rises.
Data: The Bank of Canada meets on July 30, and the May GDP will be reported the following day. There is little doubt that the Bank of Canada will stand pat with its overnight interest rate target at 2.75%. The swaps market is discounting a little more than 50% chance of another cut later this year. The economy contracted by 0.1% in April and economists expect a gain of a similar magnitude in May. That said, the median forecast in Bloomberg's survey is for a 0.5% annualized contraction in Q2 before stagnating in Q3.
Prices: The US dollar bottomed last Wednesday near CAD1.3575. It held above the year's low in mid-June (~~CAD1.3540) and the low seen early this month (~CAD1.3555). It reached almost CAD1.3515 before the weekend to overshot (61.8%) of the recent decline from ~CAD1.3775 on July 17. A move above CAD1.3780 could spur a move to CAD1.3835-65.
Australia
Drivers: The rolling 30-day correlation of changes in the Australian dollar and the Canadian dollar is around 0.77 and is slightly more than the correlation with the Dollar Index (-0.68). However, over the rolling 60-day correlation is a little stronger with the Dollar Index than the Canadian dollar (-0.71 vs 0.67). Many refer to the Aussie as a commodity currency, but the correlation with different commodities, and the CRB Index is less robust than one might suspect. Consider that the rolling 30-day correlation between changes in the Australian dollar and the CRB index has been inverse since late June (~-0.30). It was also slightly inverse from late January through late February.
Data: Two data points stand out in the coming week. On Wednesday, Australia report June monthly CPI and Q2 quarterly print. The central bank puts more weight on the quarterly reading, which looks to have softened from the 2.4% year-over-year pace in Q1. The trimmed mean and weighted median underlying measures were a bit firmer at 2.4% and 3.0% respective but also look to have eased. The other economic report of note is the following day's release of June retail sales. Retail sales rose by an average of 0.3% a month in Q1, but the average in April and May slowed to 0.1%. The central bank meets on August 12, and the futures market has nearly a quarter-point cut discounted (~93%) and 57 bp between now the end of year. That implies two cuts are fully discounted and a little more than 25% of a third in the last four meetings of the year.
Prices: The Australian dollar reached a new high for the year on July 24 near $0.6625. It was unable to sustain the momentum and retreated to the 20-day moving average before the weekend near $0.6550. Nearby support is seen in the $0.6520-40. The trendline connecting the June and July lows is found near $0.6500 at the end of the coming week. This month's low was set on July 17, near $0.6455.
Mexico
Drivers: We have suggested that Mexico's yield pick-up over the US, the modest volatility of the peso, and its near 24-hour a day liquidity makes the peso an attractive long against the greenback. Still, the peso is sensitive to the broader dollar direction. The rolling 30-day correlation of changes in the dollar against the peso and the Dollar Index is almost 0.50. Recall that as recently as early March, the correlation was inverse. The year's high was set around June 20 near 0.66. The 60-day correlation is slightly above 0.50, the most since the end of May 2024.
Data: It is an important week for Mexican data. The week starts with the June unemployment rate, which has been trending gradually higher this year after softening in the last part of 2024 to end the year at 2.43%. It was 2.75% in May. It also reported June's trade balance the day. In the first five months of 2025, Mexico recorded $2.04 bln surplus, compared with a $4.46 bln deficit in the Jan-May 2024 period, and a $6.56 bln deficit in the same 2023 period. Exports are up about 3.4% year-over through May, while imports have risen by almost 0.8%. In the middle of the week, Mexico provides the first estimate of Q2 GDP. The economy grew by 0.2% in Q2, quarter-over-quarter, but it struggled in Q2 and the median forecast in Bloomberg's survey anticipates a 0.1% decline. Consumption is seen contracting for the second consecutive quarter, and business investment falling for the third straight quarter. Government spending also looks softer. Worker remittances have been a key source of hard currency revenue for Mexico but has moderated slightly. Through May, Mexico received about $24.4 bln of worker remittance compared with $25.1 bln the first five months of 2024 and $24.7 bln in the same period in 2023. The week ends with the IMEF PMI, where the manufacturing and non-manufacturing surveys have held below the 50 boom/bust level this year. The central bank meets on August 7, and the swap market favors an unchanged outcome after four half-point cuts have been delivered this year.
Prices: The US dollar fell to a new low for the year near MXN18.5250 in the middle of last week and saw it again before the weekend as a near-term base was forged. Since the low was recorded, the greenback has held below MXN18.60. There may be potential toward the MXN18.66-MXN18.70 area. Our next downside target is the MXN18.35-40 area.
Reviewed by Marc Chandler
on
July 26, 2025
Rating:
