The US dollar fell against all of the G10 currencies last week but the Japanese yen. The softer than expected US CPI and PPI saw the US two-year yield fell by nearly eight basis points. As we show below, in current context, several of the dollar pairs are very sensitive to the changes in short-term US rates, or the like Canadian dollar, the two-year rate differential. Still, as the Middle East war re-escalated, the greenback seemed to catch a safe haven bid. In addition, the pressure on equities, especially in the Ai and tech sector continue to come under strong profit-taking pressures. It is widely recognized that foreign demand for US equities is the primary channel that is funding the US current account deficit. Yet, over the last 30 and 60 sessions, changes in the Dollar Index are more correlated with changes in the S&P 500 than Nasdaq.
The Middle East war and the sharp sell-off in equities in recent days weighs on risk-taking sentiment. These issues will carry into next week. Next week's highlights include the ECB meeting, which will most likely leave rates on hold. President Lagarde will likely keep the door open to more action, and this will support ideas of a September hike. She may also be asked about her intentions in terms of French politics. In the UK, Andrew Burnham will formally become the seventh UK prime minister since the Brexit referendum in June 2016. At the end of the week, the US Section 122 tariffs expire. The Section 301 (10%-12.5%) tariffs for using forced labor might not be ready to be implemented before the others expire. The Trump administration should be expected to address these issues in the coming days.
US
Drivers: US interest rate expectations continue to arguably be the key driver for the dollar. The 30-day correlation of changes in the Dollar Index and the two-year US Treasury yield is near 0.60, and the correlation with changes in the December Fed funds futures contract is closer to -0.70. The 60-day correlation are around 0.65 and -0.70, respectively. After the Fed delivered its hawkish hold in mid-June, the December Fed funds futures were pricing in about 38 bp of tightening this year. As recently as July 13, following the escalation of hostilities in the Middle East and hawkish comments by Federal Reserve Governor Waller, the nearly 43 bp of tightening was priced. After last week's inflation gauges and real sector data, there are about 26-27 bp of tightening discounted, the least since June 16, the day before the June FOMC meeting concluded.
Data: After the US jobs report and inflation gauges, the high-frequency data turns lighter this week ahead of next week's FOMC meeting. The market does not appear to react much to the regional Fed survey. The preliminary July PMI headline at the end of the week. The composite averaged 51.7 in Q1 26 and Q2 26. This was the lowest quarterly average since Q1 24. June new home sales are also due at the end of the week. Existing home sales were reported earlier this month and unexpectedly fell by 2.4% and were off about 4.2% in H1 26. They fell a little more than 5% in H1 25. Existing single family home sales have been considerably weaker. In the first five months of the year, they fell by almost 20%. In the Jan-May 2025 period, they fell by a little more than 5%.
Prices: The Dollar Index peaked on June 24 near 101.80 and chopped lower to reach 100.35 in the middle of last week. The downtrend line comes in near 101.20 on Monday and finishes next week closer to 101.00. The 20-day moving average is slightly above 101.00. The momentum indicators are still falling.
EMU
Drivers: The euro remains sensitive to changes in US rate expectations. The 30- and 60-day correlations with the two-year US yield remain near multi-year extremes (~-0.70 and -0.75, respectively). These correlations are more robust than the correlation between the exchange rate and the two-year differential (~ 0.55 and -0.27, respectively).
Data: The key event is the ECB meeting on Thursday. After the June hike, there is little chance of a change in policy. The swaps market has about a 22 bp higher rates discounted for the following meeting in September, when the staff will update its economic projections. After contracting by 0.2% quarter-over-quarter in Q1 26, the median forecast in Bloomberg's survey is for a 0.2% expansion in Q2. The day after the ECB meeting, the July preliminary PMI will be reported. Recall that the composite rose in June to 50 after falling to 48.5 in May and 48.8 in April. It finished last year at 51.5.
Prices: The euro continues to struggle, though it reached a four-week high in the middle of last week slightly below $1.1485. It was sufficient to lift the five-day moving average above the 20-day moving average for the first time since mid-May. However, by the end of the week, it had given back the most of its gains and settled around 1/5 cent higher on the week. The momentum indicators look more constructive than the price action. A break of last week's low (slightly below $1.1380) leaves little on the charts ahead of the year's low recorded on June 24 (~$1.1325).
PRC
Drivers: There is no doubt that the Beijing manages the exchange rate. We continue to put the emphasis on the daily setting of the dollar's reference rate. So far, this year, the rolling 30-day correlation of changes in the Dollar Index and the greenback against the onshore yuan peaked in May near 0.70 and eased to around 0.57 last week, the lowest since mid-March. The dollar's movement against the offshore yuan's 30-day correlation with the Dollar Index (~0.57 now from a peak in late April near 0.88) and is also the lowest since March. Beijing can, if it wanted, simply cite US intelligence agencies previous debunking of President Trump's re-hashed claims that China interfered with the outcome of the 2020 election (by stealing 220 mln voter files). However, that the US raised the issue in such a high-profile way of the anticipated Trump-Xi meeting (late September in NY) warns to keep expectations low.
Data: In a quiet week for Chinese data, the main feature the setting of the one- and five-year loan prime rates. They are at 3.0% and 3.5%, respectively. Expectations for a change are low, but if there is a surprise, it could be a small 5-10 bp reduction.
Prices: The dollar recorded a three-year low against the offshore yuan shortly before the Federal Reserve's hawkish hold was announced on June 17 (CNH6.7540). It reached nearly CNH6.82 a week later and has been in that range for ever since. This month's high has been around CNH6.81 and it could be retested. The PBOC has continued to guide the onshore yuan higher/dollar lower. The greenback's fix was set at CNY6.7909 on July 16, a new three-year low, nearly a month after the dollar bottomed against the offshore yuan.
Japan
Drivers: The rolling 30-day correlation between changes in the US 10-year yield and the dollar against the yen peaked in mid-June near 0.66 and fell slightly below 0.20 in early July. It is now near 0.25. The 30-day correlation between changes in the exchange rate and the US two-year yield is a little below 0.40. It peaked in May slightly above 0.65 and was about half as much a week ago. Separately, Finance Minister Katayama suggested the domestic pension funds boost allocation to Japanese asset markets, and that Japanese government bonds should be available to for individual tax-free investment vehicles (Nippon Individual Savings Accounts). The market's reaction to the reports was supportive of both JGBs and the yen.
Data: Outside of the preliminary July PMI, for which the local market tends not to follow closely, there are two highlights in the coming days: the June trade balance and the national CPI. There are powerful seasonal factors the lift the Japanese trade surplus in June. In the past 20 years, there has been one exception, 2008. Helped by the undervalued yen and AI-related foreign demand, Japan's trade balance is gradually improving. In the first five months of the year, Japanese recorded an average monthly deficit of about JPY121.5 bln. The deficit in the Jan-May 2025 period averaged ~JPY496.3 bln. Turning to the CPI, we already know that the Tokyo CPI rose from 1.4% to 1.7% and the core measure rose from 1.3% to 1.6%. A similar rise in the national reading would lift the headline to around 1.8% from 1.5% and the core rate may rise to 1.7% from 1.4%. It has not been above the 2% target this year.
Prices: Japan's markets are closed on Monday for Marine Day but some may see intervention as a risk after the threats on Friday. The dollar is firm against the yen but spent last week confined to the previous week's range. The five-day moving average (closing basis) crept slightly higher last week (~JPY162.30 vs.~JPY162.15). The yen was the only G10 currency that fell against the dollar last week. Finance Minister Katayama renewed the intervention threat, but the market barely took notice. In the days that followed her call for Japanese pension funds to boost domestic allocation, Japanese investors increased their purchases of foreign bonds. The JPY1.09 trillion bought in the week ending July 10 was the most in two months and more than the amount purchased last month. The Bloomberg surveys show many analysts see the dollar at its peak but the price action suggests there still is upside risk for the dollar.
UK
Drivers: Sterling remains highly correlated with the euro, but it has been benefiting from the dollar's pullback more. It has risen to its best in a year against the euro, and it may have helped sterling perform better against the dollar. Sterling is inversely correlated with changes in the UK's two-year yield. The 30-day inversion is minor (~-0.10). Over the past 30 sessions, changes in sterling are slightly inversely correlated with the UK's 10-year yield. The 30-day inverse correlation with changes in the US two-year yield is near -0.60. It reached almost -0.80 in the middle of last month, the most in more than two decades.
Data: Politics will rival economics in the UK in the coming days. The Labour Party's leadership challenge ends on July 17, and Burnham will formally replace Starmer on July 20. His first and most important appointment, from the market's perspective, will be the Chancellor of the Exchequer (similar to a powerful finance minister). Speculation over the appointment injected a little volatility into sterling and Gilts last week. In terms of economic data, the UK reports the four market-sensitive data points: the government finances, labor market, CPI, and retail sales. The data pose headline risks but the impact on policy expectations will likely be minimal. The BOE meets on July 30 and there is little meaningful chance of a change in policy. The swaps market leans toward a rate hike at the September meeting. Yet, the May wage data and the June time-series are unlikely to have much impact on BOE decision-makers in September.
Prices: Sterling reached a two-month high in the middle of last week (almost $1.3560) amid speculation that Home Secretary Mahmood will be named Chancellor of the Exchequer. It pulled back to around $1.3425 before the weekend on the broadly stronger US dollar and risk-off mood. This effectively retraced (61.8%) of last week's gains. The next area of support is seen in the $1.3380-$1.3400 band, which houses the 200-day moving average and the July 15 low. Sterling rallied from a low of about $1.3140 on June 24 and this has stretched the momentum indicators, which appear poised to turn lower. At the same time, sterling looks set to unwind some of its recent gains against the euro (~2.75% since June 22). The cross-rate activity, which was a tailwind for cable, could now be a tailwind.
Canada
Drivers: We have suggested that one of the key drags on the Canadian dollar has been the widening of the US two-year premium over Canada. It rose from about 90 bp at the end of April to almost 145 bp at the start of the July. During that time, the greenback rose from about CAD1.3550 to nearly CAD1.4250. Weaker US job creation in June and softer inflation gauges last week saw the US two-year premium narrow to almost 130 bp. The 30-day correlation between the exchange rate and the interest rate differential is near 0.67, the highest in more than three years. The correlation between the exchange rate and the two-year US yield is slightly below 0.45.
Data: Canada reports June CPI and May retail sales data in the week ahead. Headline CPI has risen at an annualized pace of a little more than 7% through the first five months of the year. It was slightly above 5% in the Jan-May 2025 period. The underlying median and trimmed core measures are considerably more tame (average 2.05% in May), and the central bank puts more emphasis on them. Canada's retail sales have been flattered by rising prices. Retail sales rose by an average of 0.8% a month for the first four months of the year. In Jan-Apr 2025, they fell by an average of 0.2%. The economy bounced back in Q2 after contracting by 0.1% (annualized rate in Q1 26 and 1.0% in Q4 25. However, household consumption has pulled back, from 2.9% in Q4 25 to 1.5% in Q1 26 to around 1.0% (median forecast in Bloomberg's survey) in the quarter that just ended.
Prices: The Canadian dollar posted its first back-to-back weekly gain since the end of April/early May. The US dollar approached psychological support near CAD1.4000, while the CAD1.3980 area corresponds to the (38.2%) retracement of the rally off the May 1 low, and the next retracement (50%) is near CAD1.3900. The five- and 20-day moving averages crossed for the first time in a little more than two months. The momentum indicators are trending lower.
Australia
Drivers: The Australian dollar is sensitive to the change in US two-year yields. The 60-day inverse correlation is around -.0.69, near the most in more than a decade. The 30-day correlation is about -0.56. It reached a little more than -80 last month, also the most in more than a decade. Meanwhile, the 60-day correlation between changes in the exchange rate and changes in the US-Australian two-year interest rate differential reached nearly 0.63 at the end of last week, the most since early 2018. The Aussie is also sensitive to the US dollar’s broad direction. The 60-day inverse correlation is near -0.75 and the 30-day correlation is near -0.60. Although there is much talk about Australia’s exposure to commodities and critical minerals, the equity market has underperformed. It is up about 1.25% this year.
Data: Australia reports June jobs data on Thursday followed by the preliminary PMI on Friday. Australia created about 76.5k jobs in the first five months of the year, little changed from the year ago period. However, the creation of full-time positions slowed to about 56k from 90k. The participation rate averaged 66.7% in Jan-May of this year compared with 66.9% in the first five months of last year. The unemployment rate stood at 4.4% in May. A year ago, it was at 4.1%. The central bank, which meets on August 11, may be more sensitive to inflation and inflation expectations than the labor market now. The futures market sees the Reserve Bank of Australia on the sidelines until at least Q4. The composite PMI has been in sawtooth pattern in recent monthly, chopping back and forth over the 50-threshold. It finished last year at 51.0 and were at 50.4 in June.
Prices: The Australian dollar reached a one-month high in the middle of last week near $0.7020. The upward momentum stalled, and the Aussie pulled back to almost $0.6965 before the weekend. The momentum indicators are still constructive. The $0.6960 area corresponds to the (38.2%) retracement of this month's gains and the (50%) retracement is a slightly below $0.6940 and the 20-day moving average is slightly lower.
Mexico
Drivers: The Mexican peso is sensitive the dollar's broad direction. The 30-day correlation of changes in the Dollar Index and the peso is near 0.70, which is higher than many currencies. As we have noted, the peso is one of the few emerging market currencies that trade practically 24 hours a day. It is sometimes used as a proxy for other emerging market currencies. Over the past 30-sessions, the US dollar-peso exchange rate is roughly as inversely correlated with the JP Morgan Emerging Market Currency as it is positively correlated with the Dollar Index Also, the 30-day correlation of the US dollar against the peso and the US two-year yield is slightly below 0.60.
Data: Mexico's price pressures are subsiding, and the economy appears to have recovered after it contracted by 0.6% (quarter-over-quarter). Headline inflation slowed to 3.37% in June, the slowest since 2020. The mid-July reading will be reported Thursday. Economic growth has returned. The IGAE economic activity report, which serves the function of a monthly GDP reading, will be closely watched. It rose by 1.2% in April, the largest increase since March 2020. May retail sales are due Tuesday. They jumped by 0.8% in April. The risk is that retail sales cannot maintain the surge and pullback. Still, they were practically flat in the first quarter and likely improved last quarter. Nevertheless, in GDP terms, consumption likely slowed in Q2 after growing 2.2% year-over-year in the first quarter.
Prices: The dollar tested the lower end of its recent range against the Mexican peso in the middle of last week, near MXN17.3575. It recovered and pushed a little above MXN17.55 before the weekend. The upper end of the recent range is in the MXN17.6450-MXN17.6765 area. A more serious test for the greenback may be the 200-day moving average (~MXN17.71), which the dollar has settled above since April 2025.
Reviewed by Marc Chandler
on
July 18, 2026
Rating:
