### United States
Last week, the US dollar appreciated against G10 currencies and most emerging market currencies. This upward movement has been largely driven by rising US rates. However, signs suggest this dollar recovery might be slowing. Notably, the US two-year yield ended the week lower, and the gains of the 10-year yield were moderated to under three basis points after holding firm at the 4.50% level. Midweek dollar sales were spurred by speculations, partly fueled by the White House, about President Trump potentially dismissing Fed Chair Powell. Market reactions were significant, leading to official reassurances that such a dismissal was unlikely, aiding the recovery of both the dollar and equities. While Federal Reserve Governor Waller advocated for a rate cut this month, his suggestion hasn’t garnered much support within the Fed. The probability of a rate cut in September decreased to roughly 63%, close to its annual low, hinting that Waller’s comments could stabilize expectations. Upcoming events include the flash July PMI, an ECB meeting, and Tokyo’s July CPI. A rate cut in September looks unlikely.
### Eurozone
The European Central Bank (ECB) is scheduled to meet on July 24, with no anticipated changes in policy. ECB President Lagarde is expected to offer minimal forward guidance. The current US two-year premium over Germany has risen almost 20 basis points since the end of June. Economic sentiment in the Eurozone projects a mixed picture; while some forecasts suggest traction, others point to stagnation in Q2. Forecasts for the Q2 GDP report, set for July 30, suggest stagnation following a 0.6% growth in Q1. The euro’s recent corrections have averaged around 3.4%, but the current correction is approximately 2.3%.
### United Kingdom
The correlation of sterling changes with the Dollar Index remains strong, despite softening slightly from extreme levels about a month ago. The UK’s economic outlook appears weaker than anticipated, with slowing labor markets and consistent declines in manufacturing output. The Bank of England has hinted at a gradual approach to policy, and markets expect two cuts for the remainder of the year. Recent economic data has been poor, but sterling may have established a bottom in recent days. The government’s upcoming budget will be keenly observed given fiscal concerns, with retail sales data on July 25 being a significant point of focus.
### China
The People’s Bank of China (PBOC) is guiding a gradual yuan appreciation against the dollar, maintaining a closely tracked but stable exchange rate. Chinese banks’ loan prime rates are expected to remain unchanged. Recent behaviors of Chinese banks suggest clients have been net buyers of yuan, aligning with the dollar’s recent weakness. In the near term, the yuan has been relatively stable against the dollar, declining less than 0.2%.
### Japan
Japan’s governing coalition faces challenges with potential political shifts in the upper house election on July 20, although significant market impacts seem unlikely given the likelihood of policy continuity. The correlation of changes between the dollar-yen exchange rate and the 10-year US yield has increased notably. Japan’s PMI and CPI data offer critical insights but are not typically market movers. The Tokyo CPI provides valuable insight into broader national figures.
### Canada
The Canadian dollar largely moves in tandem with the broader US dollar’s trends. There is an upcoming Bank of Canada Q2 business survey and a report on May retail sales. Despite favorable full-time job growth in May and a PMI boost, underlying disruptions, mainly from the US, may dampen sentiment.
### Australia
The Australian dollar exhibits strong inverse correlation with the Dollar Index and other commodities like copper and gold. Recent central bank meeting minutes suggested a focus on timing, not direction, of policy changes. The futures market anticipates rate cuts in the forthcoming months. Preliminary PMI estimates suggest a relatively stable economic environment, despite fluctuations in manufacturing PMI.
### Mexico
The peso remains attractive due to high yield prospects, liquidity, and modest volatility. It also acts as a “risk currency,” inversely correlated with changes in the S&P 500. Recent performance shows a period of consolidation. Economic indicators, like May’s retail sales and CPI for July, will be influential in shaping monetary policy expectations. Despite the peso’s strong performance, the broader assessment indicates potential fragility.
