Last week was momentous. There was a fragile 60-day de-escalation during negotiations between Washington and Tehran. However, the allies of both (Hezbollah and Israel) continue to clash, stalling talks. Still, oil prices tumbled 7-9%. At the same time, a new era at the Federal Reserve has begun. The new chair eschews forward guidance, and this was reflected in the terse statement and the fact that he did not participate in updated individual projections. Ironically, this led to even more weight being placed on Summary of Economic Projections. Nine of the remaining 18 Fed officials anticipated at least one rate hike would be appropriate this year. This sparked a 13 bp jump in the two-year US Treasury yield, the largest rise since April 2025, and lifted the dollar broadly.
The Bank of Japan raised its overnight target rate to 1% last week. It did not prevent the yen from extending its slide to a new low since July 2024. Given the hike, perhaps Japanese officials can count on US support for intervention in a way if did not get during the April and May intervention. By measures such as size of speculative short yen position in the CME futures, the one-way direction of the market, and volatility, conditions favor intervention more than they did at the end of April, when the market responded to what was perceived as not sufficiently hawkish message by BOJ Governor Ueda. Meanwhile, Andrew Burnham will return to the UK parliament after winning a byelection. The political drama will play out in the coming days/weeks, and many expect Burnham to become the next Prime Minister. The largely as expected results, seemed to have marginal impact at best, and the outsized nearly nine basis point rise in the UK 10-year Gilt yield was more a function of the jump in oil prices, which lifted most European yields by 5-6 bp before the weekend, and the deterioration in the government finances that were reported on Friday.
US
Drivers: The one variable whose changes remain highly correlated (~0.65) with changes in the Dollar Index is the two-year US yield over the past 30 sessions. While the dollar typically has risen alongside the increase in US rates, the Dollar Index is inversely correlated with changes in the S&P 500. Near -0.45, the inverse correlation is the least extreme since the end of Q1 26.
Data: Most of the high-frequency reports in the coming days consist of surveys, mostly from the regional Federal Reserve Banks but the preliminary June PMI will be reported on Tuesday. Real sector data include May personal income and consumption (along with the deflators, which can be extrapolated from the CPI and PPI), durable goods orders and May's goods trade deficit. The Federal Reserve meets at the end of July (July 28-29) and the bar to a change in policy is high. The Fed funds futures have about 10 basis points of tightening discounted--and if the real choice is between standing pat and hiking 25 bp, the odds of a hike are around 40%. At the end of April, the was still a small chance of a cut priced in and at the end of May, about 1.5 bp of tightening was reflected in the swaps market.
Prices: On the back of the hawkish hold by the Federal Reserve, the Dollar Index broke to the upside. It reached a new high since May 2025, and the high ahead of the weekend, slightly below 101.15, met the (38.2%) retracement objective of DXY's decline since the high in January 2025, a week before President Trump's second inauguration. Overcoming that area, target the 102.85, which corresponds to the 50% retracement and is also where the 200-day moving average is found. A note of caution, in the pre-weekend session, the Dollar Index may have recorded an ostensibly bearish shooting star candlestick. The price action on Monday will be important for the near-term technical outlook.
EMU
Drivers: The euro 's 30-day inverse correlation with the US two-year yield remains robust near -0.85. The correlation between the exchange rate and changes in the German two-year yield is also inverse but a less than against the US two-year yield, around -0.52. The euro also is the most correlated with the S&P 500 in more than a decade, near 0.75 earlier this month but has eased to a little more than 0.60. It fits into the narrative about European investors buying US equities but hedging the currency risk. The euro's correlation with changes in the Stoxx 600 is weaker (~0.27)
Data: The swaps market leans slightly toward another ECB hike next month but has it fully discounted for September and around an 80% chance of another before the end of the year. There are two surveys due this week, but neither will likely be decisive in July rate decision, barring a major surprise. First is the preliminary June PMI. Recall that in the first five months, the composite (output) fell four times and at 48.5 in May was the weakest since January 2024. The other survey is the ECB's on inflation expectations. In May, the one-year stood at 4.0% and the three-year stood at 2.9%. May's inflation was confirmed last week at 3.2% with a 2.5% core. The ECB's updated forecast is for CPI to increase by 3% this year, 2.3% next year, and 2.0% in 2028.
Prices: The euro stalled in the first half of last week near $1.1620. The backing up of US rates saw it drop to a little below $1.1420 ahead of the weekend. The low for the year was recorded in mid-March near $1.1410. The euro bounced back and reached a new session high in light North American dealings slightly above $1.1480. A potential bullish hammer candlestick was left in its wake. However, the euro still settled below the previous week's low. Regaining a foothold above $1.15 is needed to stabilize the technical tone.
PRC
Drivers: The PBOC continues to guide the yuan higher through the daily fix. The yuan is the strongest currency in Asia so far this year. It has risen by 3.20%-3.40% (offshore, onshore, respectively). A distant second is the Singapore dollar, up about 0.20%. The case that a stronger yuan would help lift other currencies in the region seems off-the-mark so far. Only the onshore and offshore yuan have risen against the greenback among Asian currencies so far this year. The dollar's performance against the offshore yuan has about a 0.65 correlation with the Dollar Index over the past 30 sessions and a little more than 0.70 over the past 60 sessions.
Data: Without signals from the central bank, Chinese banks will likely keep the loan prime rates steady at 3.0% and 3.50% for one- and five-year loans, respectively. The five-year government bond yield is little changed over the past month, near 1.45%. China also will likely confirm a 3.7% current account surplus is Q1 26. The IMF projects a slightly smaller surplus this year (3.5% vs. 3.8% in 2025), while OECD estimates steady at 3.8% before increasing to 4.0% next year. Early Saturday in Beijing, May industrial profits will be reported. Although officials have been critical excess investment, the rise in industrial profits has been largely function of two sectors--tech and materials. Industrial profits surged 24.7% year-over-year in April after rising 15.8% in March.
Prices: The dollar recorded a new three-year low against the offshore yuan in the middle of last week, near CNH6.7540 before the FOMC meeting. The broad greenback gains lifted it to about CNH6.7980 ahead of the weekend, its highest level since May 22. Near-term risk may extend to around CNH6.82.
Japan
Drivers: Changes in the dollar against the yen remain more sensitive to changes in US 10-year yields than to the 10-year interest rate differential. The 30-day correlation with changes in US 10 Treasury yields is above 0.56, easing from a new high since last September (~0.65) seen earlier last week. The correlation approached 0.10 earlier this year. The correlation of the changes in the exchange rate and the 10-year interest rate differential is around half as much.
Data: The market favors another hike by the Bank of Japan before the end of the year, though it is not fully discounted. However, given the glacial speed at which the BOJ is moving, it seems unrealistic to expect this week's data to have much impact on expectations. The market typically has muted reaction to the PMI. Still, recall that the May composite stood at 51.1, the low for this year after falling for three consecutive months. The other report, Tokyo's June CPI, is a good indicator of the national reading. In May, the national CPI stood at 1.5% and 1.4% for the core. The target for the latter, which excludes fresh food, is 2%. It has not been above the target this year. Most other countries wish they had Japan's inflation and would most likely not be raising interest rates. Japan has purchased lower inflation, as it were by providing energy subsidies. Tokyo's headline CPI was 1.4% in May, with the core at 1.3%.
Prices: The dollar reached JPY161.80 the day after the FOMC's hawkish hold. This was its best level since it came within spitting distance of JPY162 in July 2024. The greenback rose by about 0.65% against the yen last week. It is the fifth weekly gain in six weeks. It is arguably more of a one-way market now than in late April when the BOJ intervened. At the end of April, one-month implied vol was near 7% before the intervention. It reached 8.1% before the weekend, the highest May 7. As of June 9, the most recent CFTC data, non-commercials (speculators) in the CME futures have amassed the largest net short yen position since July 2024.
UK
Drivers: Of the past 30 and 60 days, changes in sterling are more correlated with the euro than the Dollar Index. However, sterling's correlation with the US two-year yield is less than the euro's over the past 30 and 60 sessions. Sterling remains not only inversely correlated with US two-year rates but is also inversely correlated with changes in the two-year Gilt yield (30-day correlation is around -0.30 and the 60-day correlation is about -0.40).
Data: The only economic report of note in the coming days is the preliminary June PMI. In May, the composite PMI fell to 49.7. The last time it was below the 50 boom/bust level was in October 2023. The BOE stood pat last week (3.75%) with a 7-2 decision, and the market is nearly evenly split about the outcome at next month's meeting. However, a hike is nearly fully discounted for the following meeting in mid-September. The political fallout from last week's byelection may take a bit of time to sort out but a formal challenge to Prime Minister Starmer, the sixth prime minister since the Brexit referendum a decade ago, is a certainty.
Prices: Sterling, which began last week above $1.35 fell slightly below $1.3165 ahead of the weekend to approach the low of the year, recorded at the end of March near $1.3160. It recovered amid the wider pullback in the US dollar and traded back toward the session high near $1.3240 in late European turnover. Near-term potential may extend toward $1.3275, while a push above the $1.3310-15 area improves the technical tone.
Canada
Drivers: Changes in the US dollar against the Canadian dollar show a low correlation over the past 30- and 60 sessions with changes in the US-Canada two-year interest rate differential (0.15-0.18). The exchange rate is more correlated with the Dollar Index (~0.57and 0.66, respectively) and the US two-year yield (~0.53 and 0.42). The exchange rate is also positive correlated with a change in Canada's two-year yield (~0.41 and 0.32). The Canadian dollar tends to weaken as US and/or Canadian yields rise. Yet, the rise of the US two-year premium began widening in in early May and has risen consistently alongside the greenback rising against the Canadian dollar. The US two-year premium rose from about 94 bp on May 1 to slightly more than 140 bp at the end of last week.
Data: The market understands the dilemma of weak growth and firm prices that Bank of Canada Governor Macklem discussed as keeping the central bank on the sidelines in the coming months. The market is pricing in a hike late this year. Still, this week's data highlights are the May CPI and the establishment jobs survey (SEPH). Through April, the headline CPI has risen at an annualized pace of about 5.4%. The core rate was at 1.5% in April, the underlying cores, which the central bank pays attention to, while Macklem has suggested it might overstate, averaging 2.05% in April. The market responds more to Canada's household survey that is often reported alongside the US jobs data on the first Friday of the following month. The US reports the household and establishment surveys, at the same time, while Canada's establishment survey is reported with a lag. In April, the household survey found a loss of almost 18k jobs, while establishment survey had a nearly 32k decline. In May, the household survey saw an 87.8k increase in jobs (154k full-time positions vs. -46.7k in April).
Prices: Since the Canadian dolla5r's slide began at the start of last month, it has fallen by about 4.15% and is the worst performing G10 currency. It remains under pressure. The Canadian dollar fell for the seventh consecutive session ahead of the weekend. The Loonie fell for the third consecutive week, and the sixth week in the past seven. The greenback reached almost CAD1.418 in North America before weekend, its highest level since April 2025. With last week's gains, the US dollar met the (50%) retracement objective of the decline from the multiyear high in February 2025 (~CAD1.48). The next retracement (61.8%) is slightly below CAD1.43. Still, some caution is in order. The US dollar settled above the upper Bollinger Band for the past three sessions, and the momentum indicators are stretched.
Australia
Drivers: The correlation between changes in the Australian dollar's exchange rate and the two-year interest rate differential is more robust than we saw with the Canadian dollar. The Aussie's correlation is about 0.60 and 0.50 over the past 30 and 60 sessions, respectively. Australia's two-year premium over the US has dropped from about 90 bp on April 30 to almost 25 bp in the middle of last week, the lowest since last November. The Aussie may be the closest thing to a proxy for gold among the G10 currencies. The rolling 30-day correlation is almost 0.85, and the 60-day correlation is near 0.73, which is the highest since early 2024.
Data: The Reserve Bank of Australia has raised rates three times this year and recognizes that the impact is being felt. The bar to another hike seems high now, and many suspect the short tightening may be over, after a short easing cycle. Still, in addition to the preliminary PMI, Australia will see three reports that feed into the RBA's reaction function: CPI, employment, and household spending. In the four months through April, Australia's inflation rose at a 5.7% annualized pace. Given the base effect (-0.5% in May 2025), the year-over-year headline rate may lurch higher from April's 4.2% pace. Australia lost jobs in April (18.6k) for the first time this year. The unemployment rate rose from 4.1% in December to 4.5% in April, while the participation rate has been steady at 66.7%. Household spending is expected to have stabilized after falling 1.1% in April, which followed a 1.6% jump in March. The swing appears to have been driven by a 1.3% decline in food (+1.6% in March), transportation dropped 4.7% (+5.4% in March) and a 2.2% contraction in clothing and footwear (+0.9%) in March.
Prices: The Australian dollar recorded last week's low in Friday's turnover, near $0.6990. It recovered to about $0.7025 by late in the European session. It fell in the past four sessions and in nine of the past 11. The technical tone remains fragile, but a move above $0.7050 would help stabilize it. That said, we continue to monitor a possible head and shoulders topping pattern. We estimate the neckline is $0.7080-$0.7100. Last week's high, slightly below $0.7090 on Monday, tested the neckline, which is not unusual in this pattern. It held and the Aussie declined for the rest of the week. Recall, that the $0.7000 also is the (61.8%) retracement of the Aussie's rally from the March low (~$0.6835).
Mexico
Drivers: The correlation between changes in the two-year US yield and the dollar/Mexican peso exchange rate over the past 30 session is near 0.79, the highest in more than 20 years. Also, it is above the 30-day correlation between the exchange rate and the Dollar Index (~0.70). Note that the 30-day correlation between changes in the exchange rate and Mexico's two-year yield is also positive (USD tends to rise alongside Mexican interest rates). It is a little below 0.50.
Data: It is a week full of important economic data and the central bank meeting on Thursday. Yet, the fact of the matter is that the economy contracted in Q1 (-0.6% quarter-over-quarter). Still, after cutting the overnight rate by 425 bp in the past two years, and most recently while the headline and core CPI were above the 2-4% target range, the central bank has signaled an extended pause. Mexico's inflation headline inflation in May slipped slightly below 4% for the first time since January. The core rate remains above 4% and the reading for the first half of June will be published on Wednesday, the day before the central bank meeting. However, before the inflation report, Mexico sees retail sales and that IGAE report, which is like a monthly GDP estimate. The day after the central bank meets, the May trade figures are due. Through April, Mexico had a $3.5 bln trade surplus compared with a $313 mln deficit in the first four months of 2025 and a $9.4 bln deficit in the same 2024 period. To put the trade balance in perspective, note the worker remittances to Mexico were $19.5 bln in the Jan-Apr period this year and almost as much in the same 2024 period.
Prices: The dollar had been in a roughly MXN17.16-MXN17.25 trading range in the few days before the FOMC meeting. The greenback spiked to almost MXN17.4370 in response to the hawkish hold. In the past two sessions, the US dollar has held below that high and consolidated. In the larger picture, the dollar seems well supported MXN17.12-15 and capped around MXN17.50-MXN17.54.
Reviewed by Marc Chandler
on
June 20, 2026
Rating:
