United States
The combination of disappointing US economic data and a weaker-than-expected jobs report on July 2—which revealed half the anticipated job creation—has significantly pressured short-term US interest rates and the greenback. The two-year US Treasury yield finished the holiday-shortened week slightly below 4.14%, retreating from 4.18% following the Federal Reserve’s hawkish hold last month and well below the peak above 4.20%. The relationship is straightforward but critical in the current environment: as goes the two-year yield, so goes the dollar. The softening in short-term rates reflects recognition that inflation expectations have eased recently, a point underscored by Fed leadership at recent policy forums. Additionally, the continued decline in oil prices has contributed to the relief in rate expectations.
The US economy appears to have accelerated further in the second quarter. After slowing to a 0.5% annualized pace in the fourth quarter of 2025 and benefiting from an upward revision in the first quarter to 2.1%, the economy appears to have grown around 2.5% to 3% in the quarter that just ended. The ISM’s June services and the final services and composite PMI readings pose little more than headline risk at this juncture. However, net exports likely deteriorated in the second quarter. The goods trade deficit jumped in May, pointing to a widening of the overall trade deficit, which will be reported in the week ahead. If the overall trade shortfall comes in line with forecasts of approximately $78 billion, the two-month average would reach about $67.5 billion, compared with an average of about $55 billion per month in the first quarter of 2026.
Housing data presents a mixed picture. Existing home sales are holding up better than new home sales, which is notable. Through May, new home sales are off about 20% this year, while existing home sales are off around 3%. The June housing series poses some headline risk, but Federal Reserve leadership has recognized that policy appears restrictive for the housing sector even if not for the broader financial sector. The minutes from the recent Federal Open Market Committee meeting will likely be scrutinized for insight into the central bank’s policy trajectory and to gauge how close Fed officials may be to considering a rate adjustment. The Fed funds futures market has almost 21 basis points of tightening discounted for the October meeting. While previous Federal Reserve administrations might have been more inclined to hike in September—when a new Summary of Economic Projections would be released—the current leadership wants to downgrade the SEP process, and one way to accomplish this before a taskforce report is to raise rates without publishing new SEP projections. Some members of the new taskforces are expected to be named in the coming days.
The Dollar Index recorded the year’s high on June 24 at 101.80. It had been consolidating above 101.00 before the disappointing June jobs data on July 2. The index subsequently fell to almost 100.55, scratching the 20-day moving average for the first time in a little more than two weeks. The momentum indicators are turning lower. A trendline drawn off the May and June lows begins the new week near 100.30 and finishes the week closer to 100.55. The DXY has already met the 50% retracement of the rally since mid-June, and the next retracement objective is near 100.30. The broader story is that the dollar rose in June against all of the world’s currencies but a handful from emerging markets. To explain the decline of a few dozen currencies, one can point to idiosyncratic developments: one country is actively managing its currency, another should have raised rates more aggressively, and yet another faces structural headwinds. The tune may be different, but the song is the same: a strong US dollar has been the dominant theme. Last month, the US two-year yield rose by nine basis points, while the comparable yield in all the other G10 countries fell by 3 to 17 basis points. Foreign investors have favored US equities over bonds, and they appeared to be among the bargain hunters who returned to US equities after the S&P 500 and Nasdaq fell for five consecutive sessions.
Eurozone
The euro continues to be highly sensitive to changes in the two-year US yield. The 30-day inverse correlation is hovering near -0.70, with the most extreme reading around the June FOMC meeting reaching approximately -0.87, which was the most extreme correlation in more than a decade. The 60-day correlation is near -0.69. By contrast, the euro’s correlation with Germany’s two-year yield or the two-year rate differential is considerably less pronounced, with 30- and 60-day correlations of approximately -0.32 and -0.38, respectively. This dynamic underscores how US monetary policy expectations are the primary driver of euro movements rather than eurozone-specific factors.
The European Central Bank hiked rates in June, and there seems to be little chance of another rate increase this month. This likely limits the market impact of this week’s high-frequency data, namely May producer prices and retail sales. Coming into May, eurozone retail sales are nearly flat in the first four months of the year. The slight softening in the preliminary June CPI takes some of the sting from the like-for-like rise in May’s PPI. Germany’s May factory orders are due on July 6 and may have stabilized after falling 3.8% in April. These data releases are unlikely to provide significant catalysts for euro movement in the near term.
The euro bottomed on June 24 near $1.1325. It reached almost $1.1475 in response to the disappointing US jobs report. However, it held below the 20-day moving average and has not settled above it since the day before the Fed’s hawkish hold on June 17. It also stalled near the halfway mark of the euro’s decline since mid-June. The next retracement objective is about $1.1510. The momentum indicators are turning higher, suggesting some potential for near-term recovery, though the technical picture remains constrained by the resistance of the 20-day moving average.
United Kingdom
A remarkable correlation development has emerged in sterling markets: over the past 100 trading sessions, the changes in sterling and the euro have a 0.87 correlation, which is higher than the correlation when the Brexit referendum was held (0.45). What is also striking is that sterling is more correlated to the euro than the Swiss franc (approximately 0.80). The Swedish krona enjoys around the same correlation with the euro as sterling over the past 100 sessions. This suggests that broader dollar dynamics and G10 monetary policy divergence are the dominant drivers of sterling rather than UK-specific factors.
The main data point from the UK in the coming days is the June construction PMI, due Monday. The sector has not been above the 50 boom/bust level since the end of 2024. Construction PMI stood at 40.1 at the end of last year and 38.2 in May, marking the lowest reading since the pandemic. This represents a significant contraction in the construction sector and poses downside risk to broader growth expectations. Political developments are also in focus, as the Labour Party’s leadership contest begins formally in the coming days, though there seems to be little doubt about the direction of political change. The UK quit the EU a decade ago last month, and while the political tumult has been significant, the Brexit decision does not satisfactorily explain the turnover in prime ministers, with Johnson, Truss, and Starmer each serving relatively brief tenures.
Sterling bottomed on June 24 near $1.3140. Last week it reached about $1.3385, its best level since the FOMC meeting. It took out the line connecting the mid-May and mid-June highs in the last two sessions but was unable to settle above it. The trendline is found slightly below $1.3350 on Monday and is closer to $1.3315 at the end of next week. The 200-day moving average is near $1.34, and sterling has not settled above it since the day before the FOMC decision. The $1.34 area also holds the 50% retracement of sterling’s decline since the May 1 high of approximately $1.3660. The five-day moving average is poised to move above the 20-day moving average for the first time since mid-May, which could signal a shift in near-term momentum.
China
The People’s Bank of China manages the exchange rate, but the process is neither random nor does it ignore market forces. The 100-day correlation between the greenback’s changes against the offshore yuan and the Dollar Index is near 0.75, making it more correlated with some G10 currencies. Nevertheless, traders watch the daily fix for signals of potential policy changes. In the last two weeks of June, the fix was raised on a weekly basis, marking the first back-to-back increase since the end of last September and before that the first half of April. However, this does not appear to signal a change in policy direction. Indeed, the PBOC set the dollar’s fix at new three-year lows last week. The PBOC has introduced a new policy tool—overnight reverse repos—and appears to have set the rate lower than expected, signaling a potential easing of other rates.
The Chinese yuan continues to stand out as a strong performer. The yuan’s gain of a little more than 3% puts it atop the Asian currencies this year. It has also appreciated against the G10 currencies, with the notable exception of the Australian dollar. In the last two sessions, the PBOC set the dollar’s reference rate at new three-year lows. The euro has fallen by nearly 9% against the yuan since peaking a year ago. The appreciation of the yuan is not as fast as its critics want, but it is moving in the desired direction. In the management of the yuan’s exchange rate, high-frequency Chinese economic data seems to have little bearing on policy decisions. The data highlight in the coming days is China’s June CPI and PPI. These inflation gauges show China as having exited deflation’s grip even as the broader economy appears to have weakened. In May, CPI stood at 1.2% year-over-year, with the core rate at 1.1%. Both look little changed in June. Producer prices increased by 3.9% in the year through May and may have edged a little higher in June. Yet, the disappointing real sector data has renewed speculation that the PBOC will ease monetary policy through rate cuts and possible reductions in reserve requirements.
Last month’s dollar peak against the offshore yuan was near CNH6.82, occurring about a week after the Fed’s hawkish hold. It has since pulled back. The dollar fell in four of last week’s five sessions and finished the week below CNH6.7850, probing the 20-day moving average, which it has not settled below since the FOMC meeting. Last week, for the sixth consecutive week, the onshore yuan settled stronger than the offshore yuan, reflecting continued PBOC management toward appreciation.
Japan
The weakness of Asian currencies despite strong AI-related exports has been a defining theme, and the Japanese yen exemplifies this dynamic. The yen’s 2.85% decline is not an outlier among Asian currencies, but the decline has been sufficient for the yen to trade at 40-year lows. The market knows it risks intervention, and traders continue to see signs in the options market that some large pools of capital have bought short-dated dollar puts to protect long dollar positions in the case of intervention. Judging from currency returns, one set of preferences among investors has been to favor higher interest rate currencies. Australia and Norway’s policy rates are the highest in the G10, and their respective currencies are on top through the first half of 2026. Latam currencies have tended to do better than East Asia currencies so far this year, and while exchange rate determination is rarely mono-causal, their high rates have been an important factor. The consensus view that another 25 or 50 basis points higher in the yen would have changed the currency’s behavior materially is questionable. The yen’s policy rate would still be higher than Switzerland’s and below Sweden’s at the lower end of the G10 policy rates.
Japan begins the new week with May labor earnings and household spending data. Recall that in April, real cash earnings rose 2.0% year-over-year, while household spending fell by 0.5%. Many US observers, arguably projecting their own country’s experience, are bemused by this dynamic: higher real income does not lead to more consumption? The answer lies in underestimating the cultural roots of consumption patterns. Consumption behavior has to be learned and is part of a range of cultural values that differ significantly between nations. For several months this year, US personal consumption expenditure increases have outstripped increases in income—the opposite of Japan’s experience. The following day, Japan reports May current account data. Japan runs a chronic current account surplus but has been experiencing a trade deficit despite the undervalued yen on most models of valuation. Still, Japan’s rolling trade deficit has been shrinking, and on a balance of payments basis, the 12-month average has returned to surplus starting in January this year for the first time in four years. At the end of the week, Japan’s June PPI will be reported. It rose 6.3% year-over-year in May, though in the first five months of the year, Japan’s producer price index rose at an annualized pace of around 11.75%.
The combination of fear of material intervention and the softer-than-expected US jobs report weighed on the greenback for the past two sessions. The dollar peaked on July 1 near JPY162.85, a 40-year high. Before the weekend, it reached JPY160.50 but settled back above JPY161, and the 20-day moving average at approximately JPY161.15. The momentum indicators are rolling over, but dollar buyers are emerging on pullbacks, and there does not appear to have been official intervention. One-month volatility finished near 7.15%, up from 6.85% the previous week. The one-month risk reversal (call/put pricing skew) showed the premium for dollar puts rose to about 1.5% last week, up from about 1.1% the previous week. The high volatility is consistent with option buying, and the large put premium suggests that dollar puts are being actively purchased by market participants positioning for potential intervention or a reversal in the yen’s weakness.
Canada
In the current environment, the Canadian dollar tends to do better when short-term Canadian rates are falling. This may seem counter-intuitive, but the 30-day correlation between changes in the US dollar’s exchange rate against the Canadian dollar was positive in the second quarter of 2026 and mostly inversely correlated in the first quarter. Still, the best thing for the Canadian dollar is a weaker dollar more broadly. The 30-day correlation between the DXY and USD versus CAD is a little below 0.70, underscoring the importance of broad dollar strength in determining loonie weakness.
It is a big week for Canada’s high-frequency data. The June services and composite PMI and the Ivey iteration are due. These surveys appear to be faring better than the hard data suggests, which could provide some support for the currency if they surprise to the upside. The central bank’s second-quarter business survey is due at the start of the week as well. The highlight of the week is at the end of the week with the June jobs report. It is difficult to envisage a better report than May’s when the unemployment rate fell to 6.6% from 6.9% and Canada created 154,000 full-time positions while losing 66,200 part-time jobs. The Bank of Canada meets on July 15, and the policy dilemma acknowledged by Governor Macklem suggests an extended pause remains the most likely scenario. Lastly, Canada announced the beginning of a new oil pipeline that will have the capacity to send 1 million barrels a day to Asia, as it seeks to diversify away from the US market.
The greenback approached CAD1.4250 last week, matching the high from the previous week. It pulled back to about CAD1.4150, an eight-day low after the US employment report. However, the US dollar bulls have not given up. The greenback finished the week slightly above CAD1.42. The momentum indicators look stretched, but support in the CAD1.4100 to CAD1.4135 range must be taken out to boost the chance that a top is in place. If not, the near-term risk extends toward CAD1.4300.
Australia
Unlike the Canadian dollar, changes in the Australian dollar’s exchange rate are positively correlated with changes in Australia’s two-year yield. Yet, at less than 0.15 and 0.25, respectively, the 30- and 60-day correlations are not particularly inspiring. More significant is the inverse correlation between changes in the US two-year yield and the aussie’s exchange rate, which stands at approximately -0.55 and -0.65 for the past 30 and 60 sessions, respectively. This reflects the dominant influence of US rate expectations on commodity-linked currencies.
Australia’s data calendar is practically empty this week outside of the Melbourne Institute’s experimental inflation gauge. It fell by 0.3% in May though rose at an annualized rate in the first five months of the year of almost 3.5% compared with a 4.4% year-over-year pace. The Reserve Bank of Australia does not meet until August 11. The odds of a rate hike this year have diminished, but the market suspects the probability is near a bottom. At the end of May, the futures market had almost 18 basis points of tightening discounted in the remainder of the year. At the end of June, about 10 basis points of tightening was priced in, and now almost 15 basis points is expected, suggesting a slight recovery in hike expectations.
The Australian dollar posted a key upside reversal last Tuesday by making a new low since early April, slightly above the 200-day moving average at approximately $0.6865, and recovering to settle above the previous day’s high. There was no immediate follow-through buying, but at the end of the week, it tested $0.6950, an eight-day high and its best level since the softer-than-expected May CPI. The $0.6950 area corresponds to the 38.2% retracement since the June 15 high of approximately $0.7080. The next retracement and the 20-day moving average are found slightly above $0.6975. More formidable resistance is seen around $0.7000. The momentum indicators are turning up but are still in oversold territory, suggesting potential for further recovery if technical support holds.
Emerging Markets
The dollar’s movement against the Mexican peso is more correlated with JP Morgan’s Emerging Market Currency Index at approximately 0.80 than the Dollar Index at 0.74 over the past 30 sessions. The 60-day correlations are about 0.81 and 0.66, respectively, indicating that the peso tracks broader emerging market currency trends more closely than the greenback’s performance against developed market currencies. Mexico’s June CPI will be released on Thursday. Headline inflation is running slightly inside the broad 2% to 4% target, while the core rate is slightly above. The central bank has been somewhat more concerned about economic weakness, but it looks as if the economy has gained some traction. On Friday, Mexico reports May industrial output. It surged 2.1% in April, the strongest since March 2021. Manufacturing’s gain of 1.2% and construction’s gain of 7.6% more than offset the decline in mining of -0.7% and utilities of -0.3%. The minutes from the recent central bank meeting—at which it held rates steady—will be released on Thursday. The swaps market is discounting the next move, a hike, by late this year.
The US dollar peaked against the peso on June 24 near MXN17.6765, its best level since early April. It has subsequently pulled back and briefly slipped below MXN17.42 ahead of the weekend, its lowest level since June 23. That area also corresponds to the halfway mark of the greenback’s gains since the June 15 low of approximately MXN17.1575 and the 20-day moving average. The next retracement is near MXN17.3550. The US dollar looks toppish against the Brazilian real near BRL5.20 to BRL5.22. The Colombian peso continues to bask in the political shift to the right. It was the best performing currency in the world last week, with a 3.7% gain and it reached its best level in six years, reflecting investor confidence in the new policy direction.
Global Markets
Equity markets across Asia, Europe, and US futures are digesting the implications of softer US labor data and lower interest rate expectations. The S&P 500 and Nasdaq had fallen for five consecutive sessions before foreign investors returned as bargain hunters, suggesting some stabilization in major indices. European equity markets are tracking the implications of ECB policy holding steady and eurozone growth data that remains tepid. Asian equity markets continue to benefit from strong AI-related export data, even as currency weakness pressures returns for foreign investors.
Sovereign bond markets are reflecting the shift in rate expectations. US Treasury yields have pulled back across the curve, with the two-year yield particularly sensitive to employment data and inflation expectations. German Bund yields are consolidating after the ECB’s June rate hike, with limited near-term catalysts for significant moves. Japanese Government Bond yields remain anchored by BOJ policy, though there is subtle speculation about eventual normalization. UK Gilts are tracking the broader G10 dynamic, with political uncertainty providing limited additional pressure given the dominance of US rate expectations.
Precious metals markets are benefiting from the pullback in real US yields. Gold has recovered from recent lows as the two-year yield has declined, reducing the opportunity cost of holding non-yielding assets. Silver has tracked gold higher, with industrial demand from AI-related manufacturing providing additional support. The precious metals complex remains sensitive to further US economic data and Federal Reserve communications.
Crude oil markets are showing continued weakness, with both WTI and Brent crude declining on softer global growth expectations and persistent supply concerns. The softness in oil prices has contributed to the relief in US inflation expectations, which in turn has pressured short-term interest rates and the dollar. Energy markets are closely watching for any signs of OPEC+ production adjustments and geopolitical developments that could support prices. The broader energy sector remains challenged by the combination of weak demand signals and ample supply, with traders positioned for further downside unless fundamental conditions shift materially.
