United States
The Dollar Index rose every session last week, marking a 0.65% gain, which, although modest, was the largest weekly gain in two months. The five-day moving average is poised to rise above the 20-day moving average for the first time since May 22, and the index has edged up to 98.10 today. A push above 98.25 would be notable from a technical perspective, although a gap from last month extends to 98.35. Tomorrow’s CPI is arguably the most important data point of the week, alongside industrial production, retail sales, and import prices. A low base effect and a 0.3% rise expected by economists polled by Bloomberg could translate into the highest year-over-year rates since February. The minutes from the recent FOMC meeting indicate that the threshold to cut interest rates hasn’t been reached. Earlier this summer, the Fed funds futures priced a September cut fully; now it’s less than 75% priced. Meanwhile, there’s ongoing speculation that remodeling costs at the Federal Reserve could provide the White House with a reason to dismiss Fed Chair Powell, although markets are largely dismissing these claims.
Eurozone
Since the euro approached $1.1830 on July 1, it has been on a declining trend, reaching approximately $1.1665 by the end of last week—the location of the 20-day moving average. Although it exceeded the 38.2% retracement of the rally since June 23, it stopped short of the 50% objective near $1.1640. It slipped closer to it today (~$1.1650), marking the fourth consecutive session of losses. A break could potentially target $1.1600 initially. Over the weekend, the U.S. hinted that without a successful conclusion to trade talks, EU goods would face a 30% levy—a move understood by markets as a negotiation tactic. Tomorrow, the eurozone is set to release May’s industrial production figures, and Germany will report on the ZEW investor survey. Despite a 2.4% drop in April, industrial production may have stabilized, concealing a strong divergence: recovery in Germany and Spain contrasts with continued contraction in France and Italy. German investor sentiment is gradually improving, likely buoyed by anticipated infrastructure and defense spending.
United Kingdom
The disappointing May GDP saw sterling fall through the $1.3530 lows, which correspond to the 61.8% retracement of its rally from the June 23 low. Sterling has declined for six consecutive sessions coming into today, and the five-day moving average has crossed below the 20-day moving average. Losses have extended to nearly $1.3450, and it has struggled to rise back above $1.3500 since hitting the low. The highlight for the week is the June CPI data due on Wednesday, followed by the labor market report on Thursday.
China
The People’s Bank of China has introduced more flexibility in the exchange rate, allowing for modest yuan appreciation. The daily change in the midpoint of the allowable dollar range has increased in recent months. The yuan is appreciating against the dollar modestly, with a 1.8% gain slightly exceeding the implied gains from the 10-year interest rate differential or inflation differential. The PBOC’s accommodating stance was evident with the reference rate set before the weekend at its lowest since last November (CNY7.1475), and today’s was slightly higher at CNY7.1491. A lower reference rate results in a lower dollar cap, which is also a higher yuan floor. The dollar is consolidating in the CNH7.15-CNH7.19 range. The larger trade surplus, aided by a recovery in U.S. exports, didn’t push the dollar outside its pre-weekend trading range against the offshore yuan (~CNH7.1675-CNH7.1760). Exports to the U.S. rose 5.8% year-on-year, driven by a 1.1% increase in imports. The trade surplus was nearly $114.8 billion, as exports to the U.S. shrank 16% year-on-year, following 34% and 21% drops in May and April, respectively. Aggregate financing slightly accelerated to CNY22.83 trillion year-to-date, standing around 26% above a year ago.
Japan
The dollar has strong momentum against the yen, reaching its highest settlement in nearly two months before the weekend, and a few ticks more today to almost JPY147.60. It is approaching a tentative trendline connecting May and June highs (~JPY147.80), with further resistance at the June high, slightly above JPY148.00. The fraying of the upper Bollinger Band (~JPY147.60) suggests caution. Interest rates are important drivers of the exchange rate, and the market seems to have priced in a firm U.S. CPI. A buy-the-rumor, sell-the-fact scenario could unfold. Private sector core machinery orders fell another 0.6% in May, as orders have returned to pre-March surge levels (13% increase). The industrial side lacks forward momentum; final May industrial production figures decreased by 0.1% instead of rising by the 0.5% estimated in a preliminary report. However, the tertiary activities index rose by 0.6% in June and 0.5% in May, indicating a strengthening service sector. The Tokyo CPI suggests a softer national figure at the end of the week. Japanese long-dated bonds saw significant declines; the 30-year JGB yield rose 10 basis points, nearing the May high of ~3.20%, and the 40-year JGB yield increased by eight basis points to ~3.43%.
Canada
Stronger-than-expected June jobs data helped the Canadian dollar recover initial losses from the U.S. 35% tariff threat. On Friday, the Canadian dollar lost about 0.20%, modest performance within the G10. The greenback has formed a base within the CAD1.3640-60 area, registering an inside day in a CAD1.33675-CAD1.3720 range today. The TSX outperformed major bourses, slipping around 0.30% ahead of the weekend. However, the 10-year yield rose to 3.50%, a six-month high. Canada will release June CPI data tomorrow, the week’s data highlight. There are upside risks linked to base effects; last June saw a 0.1% price fall. With the headline below 2% in May (1.7%), underlying core measures were elevated at 3%. Markets are re-evaluating possibilities of another cut this year, with September cut odds dropping last week to 40% from about 80% in late June. The swaps market implies a year-end rate exceeding 2.50%, highest since February.
Australia
The Australian dollar stalled after hitting a marginal new high for the year (~$0.6595). After early flurry Asia-Pacific trading on Friday, the Aussie chopped around in a fifth of a cent trading range (~$0.6560-$0.6580) and slipped to about $0.6555 today before steadying. Establishing a foothold above $0.6600 leaves little on the charts ahead of $0.6700. Despite last week’s surprise by RBA’s no-change decision, the futures market forecasts a 90%+ chance of a cut next month, with another cut in Q4 fully priced in.
Mexico
The peso shows remarkable resilience, reaching its best level since last August mid-last week near MXN18.5525. It absorbed shocks like a 50% tariff on Brazil and a 35% tariff on Canada without breaking. In fact, the dollar set its high last week above MXN. Over the weekend, the U.S. signaled that purchasing Mexican goods not meeting USMCA rules may face a 30% tariff starting August 1 unless renegotiated. The peso largely shrugged off these threats, and the dollar remains within its pre-weekend range, trading between approximately MXN18.6550 and MXN18.7175 today.
