United States
Following the recent passage of the budget, a series of significant judicial victories, and the successful negotiation of a ceasefire between Israel and Iran, the Trump administration stands at a pivotal moment in its transformation of America’s foreign economic policy. As the 90-day grace period since Liberation Day comes to a close, President Trump plans to send out letters to announce the new bilateral tariffs that U.S. importers will face on goods from certain countries. The impact of these tariffs appears limited so far, but early signs of pass-through are evident. In April and May, U.S. import prices, excluding oil, increased by an average of 0.3%, compared to the average rise of 0.1% in the previous four quarters. Federal Reserve Chair Jerome Powell has made it clear that tariffs are expected to drive up U.S. inflation in the coming months. If not for these tariffs, the Fed likely would have continued to cut rates this year. Nevertheless, the resilience of the U.S. labor market emphasizes the importance of the Fed’s patient approach, although a rate cut in September remains the most likely scenario. This week, economic data is light, with the Reserve Banks of Australia and New Zealand set to meet. The former is expected to cut rates, while the latter is likely to hold steady.
The U.S. economic landscape is dominated by a bearish dollar narrative grounded in four factors. First, international portfolios have been shifting away from an over-reliance on the dollar and U.S. equities. Second, the Trump administration’s use of tariffs, even against countries that have free trade agreements or trade deficits with the U.S., has rendered the U.S. an unreliable trade partner. Third, the administration’s belief that monetary policy should be answerable to the executive branch is noteworthy. Fourth, the Federal Reserve is expected to resume rate cuts around the time other G10 countries conclude their easing cycles.
In terms of upcoming data, high-frequency economic indicators sit between last week’s weak employment report and next week’s Consumer Price Index (CPI) and retail sales figures. Consumer credit rose by nearly $17.9 billion in April, surpassing the cumulative credit extended in Q1. The minutes from the June FOMC meeting will also be of interest. Meanwhile, the June federal deficit will be announced later in the week, with the budget deficit for the first five months of the year standing at almost $654 billion, down from $692 billion during the same period the previous year. Bloomberg’s survey forecasts this year’s deficit to be 6.5% of GDP, down from 6.9% last year.
Eurozone
In the eurozone, portfolio shifts and changes in interest rate differentials are bolstering the euro. The discount on Germany’s two-year bonds compared to the U.S. fell by nearly 25 basis points in recent weeks. However, a significant rise in U.S. jobs data saw it return to about 205 basis points. Germany’s 10-year discount also saw some fluctuations, bouncing back to nearly 176 basis points. Economic growth in the eurozone is struggling to maintain momentum after recording a 0.6% quarter-over-quarter growth in Q1. Growth is forecasted to stagnate in Q2 and barely grow in Q3. The 0.2% decline in German factory orders reported recently does not bode well for upcoming industrial production numbers, which have alternated between gains and losses in recent months. Meanwhile, Italy, often seen as the fragile member of the eurozone, has posted a notable 2.9% increase in industrial production from January to April, with May figures due soon.
Germany and France are set to release trade balance figures for May. Germany’s surplus averaged 17.5 billion euros in the first four months of the year, while France reported a monthly shortfall of nearly 7.1 billion euros during the same period. The euro’s technical levels suggest initial resistance around $1.19, with more significant resistance at $1.20.
United Kingdom
The UK economy may undergo a significant transformation, moving from the strongest in the G7 in Q1 to potentially the weakest in Q2. The Labour Party’s government, led by Starmer, has faced challenges due to a shift to the right and a series of policy reversals. An impending government shake-up is expected, though it may not occur until after summer. Sterling appreciated more than 6% in Q2, driven largely by the weakness of the U.S. dollar. The inverse correlation between sterling and the Dollar Index remains strong.
The UK will release May GDP figures, with the economy having contracted by 0.3% in April following a 0.2% expansion in March. In April, contractions were reported in industrial production, services, and an almost doubling of the trade deficit. The recent drama surrounding Starmer and Reeves led to a decline in sterling from a multi-year high. The momentum indicates a potential move toward the $1.3530 mark, with further support levels near $1.3470.
China
The People’s Bank of China (PBOC) is moderating the yuan’s appreciation by setting the dollar’s daily reference rate. While the dollar is allowed a 2% movement from the fix, it rarely strays outside the band set by trading platforms. Since April, officials have permitted a gradual decline in the dollar’s value against the yuan. Upcoming CPI and PPI releases will offer insights into China’s economic conditions, with deflation in producer prices illustrating over-investment issues. Aggregate lending is up significantly year-over-year but hasn’t translated into stronger economic activity. While a broader dollar recovery would aid Chinese officials, technical levels suggest the dollar could work its way back to roughly CNH7.1750, with the onshore yuan trading within the CNY7.1550-CNY7.19 range.
Japan
The yen emerged as the weakest G10 currency in Q2, appreciating approximately 4.1% against the U.S. dollar. The Bank of Japan’s (BoJ) capacity to normalize monetary policy remains constrained by weaker economic growth and uncertainties tied to U.S. tariffs. This dynamic has influenced the correlation between the yen and U.S. yields, with the exchange rate’s relationship with U.S. rates improving recently. However, its correlation with the Dollar Index slackened during this period. Japan is set to release May labor earnings data, with previous reports showing consistent declines in real cash earnings. Upcoming reports will also include Japan’s May current account and June Producer Price Index (PPI) figures. Recent moves by the yen suggest resistance levels around JPY146.20, with support levels near JPY144.00.
Canada
In Canada, the correlation between the Dollar Index and the Canadian dollar’s exchange rate has risen substantially over recent months. Prime Minister Carney has played a strategic role in advancing U.S.-Canada trade talks, with hopes of reaching an agreement by July 21. Canada’s employment report is due at week’s end, with recent trends indicating a weakening labor market. The unemployment rate has increased consistently since early 2024, while participation rates have slightly fallen. Despite recent gains in the Canadian dollar, technical indicators suggest potential for greenback upticks into the CAD1.3650-80 region.
Australia
The Reserve Bank of Australia (RBA) is perceived as the most dovish G10 central bank going into the second half of 2025, with multiple rate cuts anticipated. Despite expectations, the Australian dollar reached a seven-month high in late June, largely driven by U.S. dollar movements. The RBA and the Reserve Bank of New Zealand are set to meet, with the former expected to implement a rate cut. This meeting will bring the cash target rate to 3.65%, with expectations of further cuts this year. On technical charts, the Australian dollar showed hesitation near $0.6600, with retracement levels suggesting potential moves below current supports.
Mexico
Despite inflation levels above the upper target range, the Mexican central bank made a fourth consecutive rate cut in June. The Mexican peso remained stable, reaching a new 10-month low shortly after the cut. The total return from currency and interest rate pickup has been attractive, with implied peso volatility low. Mexico’s economic releases include vehicle production and exports, with the CPI and industrial production figures providing further insights. Recent dollar movements against the peso suggest an extension of declines to about MXN18.6150, with longer-term moves possibly targeting MXN18.40 levels. Resistance is identified in the MXN18.82-MXN18.85 zone.
