Markets enter July with a ceasefire that nobody quite trusts. The 60-day de-escalation between Washington and Tehran has done its job on paper, traffic in the Strait of Hormuz has increased markedly. Oil has responded accordingly, with August WTI down more than 30% from its May18 peak of over $100 a barrel. It reached around $69 compared with a little below $66 before the war began. Gasoline prices are easing slower, but the direction is clear.
In addition to the drop in oil prices, the other major force shaping the investment climate as we enter the second half is the sharp decline in equities, especially technology shares. It is not clear this marks the end of what many observers saw as a bubble or whether it is just a dramatic bout of profit-taking in a transformational technological moment.
The sharp decline in oil prices coupled with the sharp sell-off in technology shares as the first half wound down, took some pressure off interest rates. Inflation expectations appear to have stabilized.
However, there is a threat that may be less obvious than a Middle East war. It is the potential for a powerful El Niño. The weather pattern is shaping up to disrupt agricultural output, and historically that has meant higher grain, beans, livestock, poultry, and palm oil prices. Markets spent the first half of the year fixated on energy-driven inflation. July may be when food starts pulling its own weight in the inflation conversation, at precisely the moment central banks were hoping headline numbers would cooperate. A second supply shock, this one agricultural rather than geopolitical, would complicate the disinflation narrative that lower oil prices were supposed to deliver.
Critical Metals and Minerals
Rare earths are a quiet crisis. Rare earths are found in everything from electric vehicle motors to precision-guided munitions.
China's reported curbs on shipments to Japan have been disruptive enough that Washington has intervened directly, asking Beijing to ease the restrictions. Reports, for example, indicate that China has not exported any form of tungsten to Japan since the start of the year. It is used precision machinery in the auto sector, which accounts for around 10% of Japan’s GDP. China also has not sent several heavy rare earths, like yttrium, dysprosium, and terbium to Japan, which are used in LED and semiconductor equipment. Japanese companies have responded by finding some ways to reduce rare earth magnets in autos, relying on scrap as feedstocks, and recycling.
A single supplier controlling the bulk of global processing capacity is not a sustainable arrangement for anyone outside that supplier. The G7 has begun talking seriously about diversification, with new initiatives aimed at building processing capacity outside China. Starting with lithium and nickel, the G7 agreed to reduce to 60% the dependence on any one country by 2030 and 50% as soon as possible.
Talk is cheap. China first weaponized rare earths against Japan in 2010 over a dispute about Senkaku/Diaoyu Islands. Refineries and separation facilities take years, not quarters, and the rare earth’s story is a reminder that the most consequential supply chain risks are often the least visible until they are not.
Tariffs
Trade policy delivers two hard dates this month: A batch of reciprocal tariffs reverts to higher levels on July 9 unless extended, a deadline that has loomed over trade desks since the original truce was struck earlier in the year. This is the date with the least ambiguity attached to it. Either an extension is announced beforehand, or the higher rates simply take effect, and the affected sectors will know within days which outcome they got.
July 24 brings the expiration of the Section 122 tariffs; the 10% levies imposed under the president's balance-of-payments authority. Section 122 is a blunter, more legally contested instrument than the reciprocal tariff framework, and its expiration raises a genuine question of renewal versus lapse rather than a simple step up or down.
Two different legal mechanisms, two different expiration logics, all converging in the coming weeks. Markets that have grown comfortable treating tariff deadlines as negotiable will be tested on whether that complacency was earned. Moreover, in late June, President Trump threatening to impose 100% tariffs on European countries that impose a digital services tax.
Wait and See Monetary Policy Stance in July
Monetary policy, for once, may be the quiet corner of the markets in July. The ECB and the Bank of Japan both delivered hikes in June, and with oil prices now lower than when those decisions were made, the urgency behind further near-term tightening has eased. Of the six G10 central banks scheduled to meet in July, the path of least resistance is standing pat and waiting to see how the ceasefire, the tariff deadlines, and the rare earths standoff resolve before committing to another move.
The exception, and more interesting story, is the Federal Reserve. Kevin Warsh's first meeting as chair produced a hawkish hold, a statement notably terse and stripped of the forward guidance markets had grown used to. More tellingly, the new chair declined to submit his own projections to the Summary of Economic Projections, a small procedural choice that nonetheless signals something larger.
The post-Powell Fed is going to communicate differently, and July's FOMC meeting will offer the first real test of whether that opacity is a deliberate strategy or simply a new chair still finding his footing. Markets that built their playbooks around the old Fed's communication style are operating with an outdated map. Still, the idea that there is no forward guidance may underestimate market participants. The nine of 18 Fed officials expected at least one hike would be appropriate this year and 2/3 of those see more than one hike being necessary.
Bannockburn World Currency Index
Bannockburn's World Currency Index is composed of the currencies of the dozen largest economies--half of which are from high-income countries and half from emerging markets. It fell by a little more than 1% through late June after it edged up aby around 0.15% in May. It is practically flat in H1 26.
The BWCI’s decline in June reflected the broad decline of nearly all the currencies in the index. The greenback itself was unchanged, of course. It accounts for about a third of the index and dampens the volatility of the BWCI. The only currency in the index that did not fall was the Indian rupee, which rose by about 0.65% against the greenback. However, the rupee’s weight is about 4.5% so the impact was de minimis.
Among the G10 components, the Australian dollar fell the most, nearly 4%. The Canadian dollar experienced a 10-day slide in the June and lost about 2.7%. The euro depreciated by slightly more than 2%. The yen, where intervention was threatened, fell the least, dropping about 1.5%. Sterling eased about 1.8%.
Turning to the emerging market components of BWCI, the Russian ruble tumbled 8.75%. It has a weight of about 2.5%, making the impact little more than a rounding error. The Brazilian real lost around 2.7% and the South Korean won fell slightly more than 2.1%. The Mexican peso slipped by around 0.85%, making it among the best performers in our index. The Chinese yuan, which has about a 21.5% weight fell by 0.5%.
In early May, BWCI took out the 2025 high but stalled near the late 2024 high. In June, it pulled back into two steps. The first was about 0.6% (to about 91.70). It recovered and in the middle of the month rose to around 92.10. The second step took it to almost 91.10, its lowest level since early April. The low for the year was recorded in late March near 90.75.
U.S. Dollar: The dollar broadly extended May's gains in the first half of June, but it was simply approaching the upper end of its range, around 100 on the Dollar Index. The hawkish hold by the Federal Reserve coupled with the continued apparent resilience of the US economy put the greenback sparked a surge. In the next week, it went on to make new highs for the year against more than half of the G10 currencies. Yet, with the derivative markets pricing in one hike fully and around a 50% chance of another, we suspect the interest rate adjustment is nearly complete, pending new information. Only half of the 18 Fed officials that participated in the Summary of Economic Projections exercise anticipated at least one hike would be appropriate this year, and roughly half of them thought two or more hikes would be necessary. The US economy is proving more resilient than expected. The Bloomberg US hard data surprise model reached its highest level in four years in early June. Notably, the labor market has improved. In 2025, the US created an average of 10k jobs a month. In the first five months of this year, the average was nearly 115k. A critical unknown is whether the pullback in energy prices will be disinflationary or will it boost discretionary spending, which in turn could underpin prices.
Euro: The European Central Bank lifted key rates by 25 bp in June but the Federal Reserve's hawkish offset it in full, and the euro extended its losses to a new low for year near $1.1325. While a break of $1.13 could target $1.11, we are more inclined to look for corrective gains in the coming weeks on the assumption that the US interest rate adjustment to the new Fed and data surprises have run their course and the US two-year premium over Germany may have peaked after reaching its best level since last September. The upside correction we envision may have potential toward $1.1500. The ECB meets on July 23. After hiking in in June, and given the retreat in oil prices, officials are likely to stay on the sidelines in July. Still, the swaps market has another hike fully discounted by the end of the year. The EU has begun taking a hardline toward the trade imbalance with China and this risks retaliatory measures. Lastly, late in June, ahead of the July 4 deadline, the EU completed the approval of trade agreement with the US. It agreed to end tariffs on US industrial goods and some agriculture products in exchange for a 15% tariff cap on exports to the America. Still, the relationship between the two allies remains strained.
(As of June 26, indicative closing prices, previous in parentheses)
Spot: $1.1384 ($1.1661) Median Bloomberg One-month forecast: $1.1493 ($1.1694) One-month forward: $1.1398 ($1.1674) One-month implied vol: 5.6% (5.0%)
Japanese Yen: Since the end of May, the dollar has traded between about JPY159.25 and JPY161.95. It matched its best level since the end of 1986. The BOJ intervened in April and May, but unlike in January, when the US Treasury offered verbal support, it was quiet about the yen in June. The BOJ's 25 bp rate hike failed to lend the yen much support and neither did the decline in US interest rates. The market knows it is tempting another bout of intervention, and the BOJ rate hike delivered, the US may be more supportive. It appears dollar puts have been bought in the options market as some large polls of capital buy insurance that could turn a profit if intervention materializes. Outside of yen weakness, the conventional view that the BOJ is behind the in the monetary cycle seems exaggerated. First, core inflation has not been above the 2% target this year. The US core PCE deflator is more than double Japan's 1.4% core rate, for example. Second, Japanese growth is fragile. After contracting in Q3 25 at 2.3% annualized pace, it took the next two quarters to recover the lost output. The median forecast in Bloomberg's survey is for near stagnation in Q2 amid weaker consumption, government spending, and net exports. The market has the next hike nearly fully discounted at the end of the year. Lastly, we are monitoring the impact of Chinese export controls on critical earths and magnets on Japanese industry. Some efforts have been made for work arounds, alternatives, and some elimination of some magnets but the bite may still become more pronounced in the coming months as domestic inventories are depleted.
Spot: JPY161.74 (JPY159.27) Median Bloomberg One-month forecast: JPY160.11 (JPY158.00) One-month forward: JPY161.35 (JPY158.88). One-month implied vol: 6.8% (6.1%)
British Pound: Sterling was not match for the surging greenback in June, but it was one of two G10 currencies that did not fall 2% or more in the month through June 26. It was sold to a marginal new low for the year ($1.3140) on June 24. If that area does not hold, the risk may extend to $1.2980-$1.3000. May retail sales (reported in volume terms) were stronger than expected and the April series was revised higher. Headline and core CPI were subdued. The swaps market no longer has a hike fully discounted by the end of the year. As recently as mid-May, 60 bp of tightening this year priced in and now about 20 bp are. A rising interest rate environment exhausts the government's headroom on fiscal policy. Government borrowing in May was the highest in the month since the pandemic. The risk is a jump in UK CPI in July as the energy cap will be increased by 13%. Meanwhile, Prime Minister Starmer resigned as the sixth UK leader since Covid. There will be a Labour leadership contest, but with the former health secretary Streeting endorsing former Manchester mayor, Burnham, it could turn into a coronation of sorts in the middle of July.
Spot: $1.3200 ($1.3456) Median Bloomberg One-month forecast: $1.3235 ($1.3400) One-month forward: $1.3205 ($1.3455) One-month implied vol: 6.3% (6.1%)
Canadian Dollar: The slide in the Canadian dollar that began from May 1 low extended through June, pushed it to its lowest level since April 2025. The next important technical area for the US dollar is near CAD1.43. The key driver appears to be the divergence of monetary policy expectations. The US two-year premium over Canada has risen from 90 bp in early May to over 140 bp in late June. It approached last year's high, near 155 bp, which was the highest since May 1997. The Canadian economy contracted in Q4 25 (-1.0% annualized) and in Q1 26 (-0.1%). The Bank of Canada cut its overnight lending target rate by 100 bp last year and 175 bp in 2024. The policy rate stands at 2.25% and headline inflation in May was at 3.2% (up from 2.8%) and the underlying core rates average about 2.05%. The central bank meets on July 15, but the market sees little chance of a change in policy until Q4 at the earliest. The USMCA is unlikely to be reapproved (by July 1) but this does not terminate the agreement. Instead, it would automatically enter a period of annual reviews that theoretically can run until 2036. President Trump has threatened to leave it but six-months notice is required, and Congress would demand a voice.
Spot: CAD1.4196 (CAD 1.3793) Median Bloomberg One-month forecast: CAD1.4159 (CAD1.3700) One-month forward: CAD1.4192 (CAD1.3775) One-month implied vol: 4.5% (4.0%)
Australian Dollar: June was the second consecutive month that the Australian dollar weakened. It has not recorded back-to-back monthly losses since the end of 2024. The Aussie slid by around 3.9% through late June, which also is its largest monthly decline since the end of 2024. Yet, in the first half of the year, the Australia dollar is t the strongest G10 currency (3.5%) and one of two that has risen against the US dollar (the other being the Norwegian krone). The central bank's three hikes this year appears to be beginning to have impact. The futures market suspects the mini-tightening cycle might be over but sees risk of one more hike in Q4. The Australian dollar is has approached the upper end of a band of support in the $0.6830-50 area. A break signals another 1-2 cent decline. Over the past 30 and 60 sessions, changes in the Australian dollar are more correlated with changes in the US two-year yield (-0.68) than the Australian two-year yield (about 0.13 and 0.05, respectively) and the two-year interest rate differential (around 0.55).
Spot: $0.6896 ($0.7185) Median Bloomberg One-month forecast: $0.6964 ($0.7150) One-month forward: $0.6893 ($0.7181) One-month implied vol: 7.7% (7.6%)
Mexican Peso: Like most emerging market currencies, the Mexican peso fell out of favor in June. It was only the fourth month since the end of 2024 that the peso declined against the US dollar. The dollar had been consolidating quietly in the lower end of its two-month range near MXN17.20 before the Warsh Fed delivered its hawkish hold. A little more than a week later, the greenback reached MXN17.6765, its highest level since early April. The exchange rate also is sensitive to the risk environment. Over the past 100 sessions, the correlation between the changes in the exchange rate and the S&P 500 is near 0.70, the highest since 2020. Last month, we anticipated the dollar to rise into the MXN17.58-MXN17.65 area. The next important technical area is MXN17.75-MXN17.80. Meanwhile, it appears that the Mexican economy is gaining some traction after contracting 0.6% in Q1 26. Headline CPI is also moderating and appears poised to move back within the 2%-4% target range. The review of the USMCA also poses a risk for Mexico. The June 2026 U.S.-Mexico talks included steel, aluminum, automobiles, rules of origin, and economic security. That suggests Washington is linking tariff relief and USMCA preferences to stricter regional-content and anti-circumvention measures.
Spot: MXN17.5053 (MXN17.3552) Median Bloomberg One-month forecast: MXN17.5310 (MXN17.4000) One-month forward: MXN17.5490 (MXN17.3986) One-month implied vol: 8.5 (8.4%)
Chinese Yuan: Beijing has allowed the yuan to appreciate this year, and its roughly 2.8% year-to-date gain puts it near the top of emerging market currencies. The others that are stronger have considerably higher interest rates. However, the yuan's appreciation is too small to have much impact on trade flows, and this is a source of angst for many of its trading partners, especially after a recent OECD report underscored the extensive subsides Chinese businesses have received. However, calls for a new Plaza-like agreement to revalue the yuan are unlikely to get much traction without Beijing's assent and neither the US nor Europe have offered any quid pro quo. Meanwhile, China has weaponized its critical materials since US "Liberation Day" last April and Japan has been especially singled out after Prime Minister Takaichi said aloud what many recognized: China's control of Taiwan would pose a security threat to Japan. After the US added of China's largest companies to the growing list of companies that aid China's military, Beijing retaliated in kind and blocked sales to two US rare earth companies and added a few dozen companies to a list that are banned from participating in Chinese government procurement. The G7 initiative to reduce reliance on any one country (China) to 60% by 2030 and to 50% "as soon as possible" seems late given that Beijing first weaponized chokehold on rare earths and magnets against Japan more than a decade ago. Lastly, we note that the 100-day rolling correlation between the dollar's movement against the offshore yuan and Dollar Index is near 0.75, the highest since late 2024.
Spot: CNY6.8005 (CNY6.7662) Median Bloomberg One-month forecast: CNY6.7900 (CNY6.8000) One-month forward: CNY6.8121 (CNY6.7808.) One-month implied vol: 2.3% (2.3%)
Reviewed by Marc Chandler
on
June 27, 2026
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