The market has not been comfortable since the Federal Reserve meeting at the end of July. Despite the lip-service paid to the Fed's price stability mandate, only three officials favored doing something (raising rates) about it. It was hardly a coincidence then that the media reported that people close to the Fed chair said that a further increase in price pressures could spur Warsh into action in September. However, the following day, the July jobs data warned that the recovery in the labor market seen earlier this year may be stalling. After the loss of jobs in July, and the downward revisions, the three-month moving average stands at 20k, down from 142k in May. The decline in the unemployment rate to 4.1% from 4.2% can be traced to the drop in the participation rate, which at 61.4%, matches the lowest since the pandemic. The futures market saw the odds of a hike next month fall to about 44% from around 72% a week ago.
The data highlight in the week ahead are the US inflation gauges, and they look softer. It will be difficult to rebuild expectations of a Fed hike next month. The central bank of Australia and Norway meet in the coming days, but both are expected to standpat. The derivatives market seems more comfortable with a Norwegian rate hike before the end of the year than a move by the Reserve Bank of Australia. Subjectively, we suspect the risks of a hike by the RBA may be a bit higher than the market, which has slightly more than a 45% chance of a fourth hike this year. The market continues to probe for the pain threshold of officials on the yen. And even after the US employment report, the greenback finished the week, a little below JPY158 and still in the upper end of the range since the intervention.
US
Drivers: The Dollar Index's 30-day correlation with changes in the US two-year yield fell from the year's high near 0.80 shortly after the June FOMC meeting and reached nearly 0.40 by the end of July. That was the lowest since late April. It has stabilized and is now near 0.62 The 30-day correlation with changes in the US 10-year yield peaked in early June near 0.75 and by late July dipped below 0.10. It is now a little above 0.35. The correlation was inverted in the second half of February.
Data: The July CPI and PPI are the data highlights of the week, but US also reports retail sales and the July budget (deficit). At the end of the week, the preliminary August University of Michigan consumer survey will be released. It is difficult to imagine a more benign inflation report than the one in June. Then the headline CPI fell by 0.4% and the core was flat. The median forecast in Bloomberg's survey is for a 0.1% increase in headline rate and 0.2% in the core rate. Given the base effect, the year-over-year headline rate may slip to 3.4% from 3.5% and the core could ease to 2.5% from 2.6%, depending on the rounding. Producer prices are expected to have risen by a 0.2% and 0.3%, for the headline and core, respectively. If so, the headline pace will moderate to about 4.9% from 5.5%, and the core can ease to 4.2% from 4.7%. The impact on Fed policy is likely to be minimal: the FOMC does not meet until September 16. Still, the disappointing July employment report, which saw the first net loss of jobs since February, suggest the bar to a hike in September, though the Fed will have another jobs report and August CPI and PPI in hand when it meets. Turning to retail sales, which have been flattered by higher prices, the average monthly increase in H1 was 0.8%. In H1 25, the average increase was 0.1%. Excluding autos, gasoline, food services and building materials, a core measure used in some GDP models, is expected to slow to 0.3% from 0.5%. The comparative numbers are 0.7% and 0.2%, this year's average monthly gain and H1 25. Then, there is the federal deficit. Through the first nine months of the fiscal year, it has recorded a cumulative $1.37 trillion deficit, which is about $30 bln more than in the year ago period and $100 bln more than in the first nine months of the previous fiscal year. The Congressional Budget Office projects the deficit will reach $1.92 bln this year (5.8% of GDP). That means an average deficit of about $183.3 bln a month in the last three months of the fiscal year. In the last three months of FY25, the shortfall averaged $146 bln a month.
Prices: The poor jobs report saw US interest rates slide the dollar drop. The Dollar Index fell to a marginal two-month low near 99.40. It traded above 100.00 in three sessions last week and failed to settle above it once. The 200-day moving average is a little below 99.20. The Dollar Index has not settled below it since mid-May. Below there, initial support may be around 99.65-75. The potential double top pattern projects toward 98.80.
EMU
Drivers: The euro has become a little less sensitive, less correlated with the changes in the US two-year yield. The 30-day rolling correlation's multiyear extreme was reached around the FOMC's meeting in June near -0.87. It is now near -0.62. The euro is also less correlated with changes in Germany's two-year yield. As we have noted before, the euro is frequently inversely correlated with changes in Germany's two-year yield, which is to say rising short-term German rates do not coincide an appreciating euro. The inverse 30-day correlation reached a multiyear high in early June (-0.63) but has steadily shifted and in late July reached a little beyond +0.10, a seven-month high. It is now back to around -0.15. What about the two-year differential? The 30-day correlation was slightly positive in early June but spent most of the second half of July around -0.60, the largest inversion since last September. It is now around -0.50. Meanwhile, the euro's rolling 30-day correlation with the US S&P 500 and NASDAQ has fallen to the 0.20-0.30 area, respectively, which are the lows since March.
Data: The eurozone reports June industrial output and trade figures and they will help with the revision of Q2 GDP, which is due at the end of the week. The initial estimate was that the aggregate economy expanded by a better-than-expected 0.4%, which was the best since Q1 25. However, the data will not impact the policy outlook or likely trading considerations. The swaps market is discounting around an 83% chance of a hike at the September 10 ECB meeting.
Prices: As we noted previously, the euro broke above the down May-June-July down trendline at the end of July. The boost after the loss of US jobs lifted the euro above the down trendline drawn off the late January, mid-April, and May highs. It came in near $1.1550 before the weekend. The next technical target is around $1.1625, which corresponds to the mid-June high (before the FOMC meeting), the 200-day moving average, and the halfway point of this year's range. The momentum indicators are rising but are in overbought territory.
China
Drivers: Officials are continuing to signal their acceptance of a gradual appreciation of the yuan. It has been modest against the dollar (~3.6% year-to-date) but it is the strongest currency in the region this year. The yuan has also risen against most G10 currencies more than it has against the US dollar. While many offer their pet reasons, the one thing we can bank on is that Beijing sees this in its interests. On a weekly basis, the PBOC's dollar fix has fallen in all but six times since the end of last September. Last week was the seventh.
Data: Beijing is expected to report July lending figures and the Q2 current account (surplus). It looks as if shadow banking lending rose while bank lending remains miserly. Toward the end of the week, the current account is due. In recent years, Chinese figures tend to be soft in first half of the year and rise, often dramatically in H2. There are some observers who argue that the current account surplus is understated, but they often cite other Chinese data series without being able to establish the veracity of the other data. There also are some economists that argue that Chinese trade surplus has peaked. The IMF expects the current account surplus to fall to 3.5% of GDP this year from 3.8% last year and anticipates it falling to 3.3% next year. The OECD expects it to be steady at 3.8% this year before rising to 4% next year. The median forecast in Bloomberg's survey is for a 3.5% surplus this year and 3.2% next.
Prices: The dollar fell to almost CNH6.74 before the weekend. It is the lowest level since February 2023. The low in early Q1 23 was about CNH6.6975. That is the next obvious chart area. In the middle of last week, the PBOC set the dollar's reference rate at CNY6.7889, a new low since February 2023. The greenback's losses before the weekend suggest a lower fix on Monday.
Japan
Drivers: The intervention injected a new force into the mix. For the first time since early 2023, the 30-day correlation of changes in the exchange rate and the 10-year US yield slipped into inversion. It is around 0.65% in mid-June and is now slightly above 0.10. The correlation between the exchange rate and the 10-year JGB fell from around 0.25 before the intervention to almost nothing (slight inversion at the end of last week). And the correlation between the exchange rate and the 2-year Japanese yield is also slightly inverted (-0.05). Contrary to declared intentions, the intervention injected volatility and contributed to weakening relationship between the exchange rate and interest rates. Perhaps, if the US supported in word or deed Japan's heavy intervention in April and May, when its silence was deafening, there would not have been a need for intervention now.
Data: Early on Monday, Japan will report the June current account (surplus). There is strong seasonal pattern of deterioration in June--past 13 years without failing to be less than May's and 18 of the past 20 years. Still, the OECD forecasts Japan's current account surplus this year at 5.2% of GDP (4.9% in 2025), though it is notable that the IMF expects it to narrow to 3.8%. Counter-intuitively, an even stronger seasonal tendency is for the trade balance on the balance-of-payments basis to improve. There has been only one exception in the past 20 years. Japan reports July producer prices on Thursday. While the targeted measure of consumer prices has not been above 2% this year, producer prices are high at 7.1% year-over-year in July, the highest since the end of Q1 23. The weak yen exacerbates the increase in energy and commodities. The swap market boosted the chances of a BOJ rate hike next month to about 65% from about 23% before the intervention.
Prices: The market challenged officials by pushing the dollar a little above JPY158.55, a new high since the intervention. However, the disappointing US jobs report saw the greenback drop slightly through JPY156.70, a four-day low. The JPY156.50 area corresponds to the (61.8%) retracement of the post-intervention bounce. And the JPY155 area was the low in the spring intervention and also the more recent operation. If officials were as market savvy many seem to believe, they would have, we suggest, intervened when while the dollar was offered. The momentum indicators are oversold.
UK
Drivers: Changes in sterling are more correlated with changes in short-term US interest rates than UK rates. Over the past 30 sessions, the correlation between changes in sterling and UK two-year is around -0.18. The 30-day correlation between changes in sterling and US rates are around -0.53. Meanwhile, sterling's rolling 30-day correlation with the changes in the euro has fallen from a two-and-half year high in May (~0.95) to almost 0.77 in late July (a four-month low). It is now a little above 0.80.
Data: The UK will publish its preliminary estimate of Q2 GDP on Thursday. After posting quarterly growth of 0.6% in Q1, the economy seems to have slowed in Q2, and the median forecast in Bloomberg's survey is for a more modest pace of 0.2%. The cumulative monthly GDP estimates were 0.8% in Q1 and in April and May, flat. June details will also be released. The Bank of England meets on September 17, and it will have more data. The swaps market is slightly less than fully discounting a hike this year. Recall that as recently as July 23, nearly two hikes were discounted (48 bp).
Prices: Sterling traded in a roughly $1.3420-$1.3505 range on Monday, August 3, and remained in that range until the US jobs data at the end of the week lifted sterling to almost $1.3510. Sterling posted an ostensibly bullish outside up day ahead of the weekend by trading on both sides of the previous day's range and settling above it high. Last month's high was closer to $1.3560. The halfway mark of this year's range is about $1.3505, and the $1.3590 area is the (61.8%) retracement of sterling losses since the last January high, slightly shy of $1.3870.
Canada
Drivers: The Canadian dollar continues to be sensitive to the changes in the US two-year premium over Canada. The 30-day correlation between the exchange rate and two-year differential reached nearly 0.75 in late July, the highest since Q1 18. Now near 0.68, it is slightly above the highs in 2024-2025. The 30-day correlation between the exchange rate and the Dollar Index is near 0.59, which is slightly below the middle of this year's range. In the past, we have noted a risk-off characteristic of the Canadian dollar. With a few minor exceptions, the correlation between changes in the USD-CAD exchange rate and the S&P 500 were inversely correlated since mid-2025. This is to say, the Canadian dollar tended to appreciate when the S&P 500 advanced. However, since the end of July the correlation has swung positive. The US dollar tends to appreciate against the Canadian dollar when the S&P 500 rises. Around 0.20, the positive correlation has not been this high since June 2025.
Data: Canada has a light economic calendar in the coming days. Neither building permits, nor manufacturing sales, or wholesale sales capture the market's attention. The Bank of Canada does not meet until September 2 and the swaps market prices in practically no chance of a change in policy, even after the better-than-expected July employment report that saw the unemployment rate slip to 6.4% from 6.5%, a two-year low, despite the rise in the participation rate (65.1% vs. 65.0%).
Prices: The diverging employment reports before the weekend saw the US two-year premium over Canada narrow by almost nine basis points, the largest such move since late March. And around 123 bp, it is the narrowest in more than two months. The US dollar had been finding support on a closing basis near CAD1.4000 punched through and fell to slightly below CAD1.3945. The CAD1.3980 area corresponded to the (38.2%) retracement of the greenback's rally starting on May 1. The next retracement (50%) is near CAD1.3900. It settled below the lower Bollinger Band (~CAD1.3965). The momentum indicators are stretched.
Australia
Drivers: The Australian dollar has also become less sensitive to changes of US two-year yields since it reached a little beyond -0.80, the most in at least 30-years in early June. It is now near -0.52. The exchange rate is more sensitive to the broad movement in the US dollar (DXY), with the 30-day inverse correlation near -0.62. The exchange rate is not sensitive to changes in Australia's two-year yield (less than 0.15). The 30-day correlation of changes in exchange rate and gold was practically halved to about less 0.43 in the past two months. It is now near 0.49.
Data: While there is the NAB business confidence survey and Q2 homeowner data, the highlight of the week is the central bank meeting on Tuesday. The futures market is pricing in practically no chance of a change in the 4.35% cash rate target. The RBA does not seem to be in a hurry to hike rates again after the three earlier hikes this year and the softer than expected June CPI reinforced the speculation that it will remain on the sidelines. However, officials cannot be comfortable with an acceleration in price sector credit expansion and stronger household spending in June. It also suggests that the wealth effect from falling house prices has not hit consumption (yet?). The futures market is pricing in a nearly 60% chance of a hike before the end of the year, up from about a 46% chance at the end of July.
Prices: The Australian dollar reached almost $0.7080 before the weekend. That is the highest level since the day before the Fed delivered its hawkish hold on June 17. The Aussie peaked this year on June 6 near $0.7280. The $0.7070 area corresponds to the halfway point of this year's range. The next retracement (61.8%) is around $0.7120. The momentum indicators are still rising but are stretched and it has been knocking on the upper Bollinger Band (finished last week slightly above $0.7065).
Mexico
Drivers: The US dollar's movement against the Mexican peso is slightly more correlated with the US two-year yield (~0.58) is more correlated with the Dollar Index (~0.50) over the past 30 sessions. There seems to be an element of risk appetite that is also reflected in the exchange rate. Its inverse 30-day correlation with the S&P 500 (~0.60) suggests that the peso's recent appreciation may have been aided by the rise of the S&P 500 to record highs. The strongest correlation we observed continues to be the JP Morgan Emerging Market Currency Index (~-0.74).
Data: June industrial production will be reported on August 11. It contracted in Q1 but has done better in Q2 because of a 2.1% surge in April, the most in five years. Output fell by 0.8% in May, and the IMEF manufacturing index warned that that growth is fragile. The manufacturing PMI rose to 51.3 in June, which was the first reading above 50 since June 2024. That said, Mexico's exports of AI-related hardware and computer equipment to the United States (including commercial servers and data center infrastructure) have surpassed traditional automotive shipments for the first time. Driven by an 84.5% year-over-year surge, these technology shipments reached a record $105.8 billion between January and May 2026, overtaking the country's leading auto sector. Is it China? No, Taiwan, who is now Mexico's 3rd largest trading partner (up from 8th in 2022). Taiwan companies assembling in Mexico.
Prices: The drop in US rates and the rally in US stocks after the disappointing US July employment report sent the greenback to about MXN17.0925. The multiyear low was recorded in mid-February near MXN17.0865. Previous support around MXN17.20 may now offer resistance. While there are several crosscurrents in the foreign exchange market, the many high-yielding emerging market currencies, including the Mexican peso, the South African rand, and Hungarian forint gained against the dollar last week despite the squeeze om yen (and Swiss franc) funded carry trades. It looks like the dollar may be the preferred funding currency now.
Reviewed by Marc Chandler
on
August 08, 2026
Rating:
