Tears for Fears

US

USD is range-bound near cyclical lows ahead of a series of key economic data releases:

June non-farm payrolls report (1:30pm London). Non-farm payrolls are expected at 106k vs. 139k in May. Bloomberg’s whisper number is 96k. For reference, payroll job gains averaged 149k per month over the past twelve months while the breakeven pace of job gains needed to keep the unemployment rate stable is between 80k and 100k.

We see risk of a sub-100k print. Continuing jobless claims rose in the week ending June 14 to the highest level since early November 2021, the ISM manufacturing employment index dropped to a three-month low at 45.0 in June, and ADP private sector jobs unexpectedly declined by -33k in June (consensus: 98k, prior: 29k).

The US unemployment rate is projected at 4.3% vs 4.2% in May which would track below the Fed’s 2025 projection of 4.5%. Average hourly earnings are forecast at 3.8% y/y vs. 3.9% in May. Overall, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation target given annual non-farm productivity growth of around 2%.

May trade balance of goods and services (1:30pm London). The trade deficit is expected at $-71bn after narrowing at a record pace in April to $-61.6bn. The April trade deficit is the smallest since 2023 and is due to a tariff-related -16.3% m/m record plunge in imports. Net exports is on track to be a significant driver of growth over Q2. As of July 1, the Atlanta Fed GDPNow model estimates Q2 growth at 2.5% SAAR with net exports contributing a whopping 3.5 percentage points to growth.

June ISM services index (3:00pm London). Headline is projected at 50.6 vs. 49.9 in May. The regional Fed ISM services prints suggest risk are skewed to the upside. Of note, the S&P Global services PMI dipped in June to a two-month low at 53.1 vs. 53.7 in May.

In our view, a sustained rebound in USD hinges on a solid pick-up in US economic growth prospects. Unfortunately, the risk for the US economy is that it’s drifting towards a stagflationary path, which poses a headwind for USD.

UK

GBP and gilts plunged yesterday on speculation Rachel Reeves may not remain as Chancellor of the Exchequer for long. The concern is that Reeves’s potential replacement would most likely be a fiscal dove given Prime Minister Sir Keir Starmer constraint in steering his Labour government away from the left. In response to the market turmoil, Starmer eventually gave Reeves his full backing saying she would remain as chancellor “for many years to come.”

Regardless, the government’s sharp U-turn on welfare reforms means higher taxes are in the pipeline when the next 2025 Autumn Budget is presented in October. Higher taxes, combined with weak underlying UK GDP growth and labor market slack emerging, could force the BOE to cut the policy rate more aggressively than anticipated.

The swaps market implies a total of 75bps of BOE easing over the next 12 months. In contrast, the ECB’s rate-cutting phase is close to wrapping-up. As such, EUR/GBP has room to edge higher towards 0.8800. The June BOE DMP survey of inflation expectations is the domestic data highlight (9:30am London).

EUROZONE

EUR/USD is consolidating above 1.1800. ECB publishes the Account of its June 5 policy meeting (12:30pm London). At that meeting, the ECB reduced the policy rate 25bps to 2.00%, as was widely expected. Only one Governing Council member didn’t support the decision to cut. Importantly, President Christine Lagarde’s stressed the ECB is likely “getting to the end of the monetary-policy cycle.” Indeed, the swaps market implies just one 25bps rate cut over the next 12 months and the policy rate to bottom at 1.75%.

The Account may offer insights into the discussion around the euro’s appreciation. A couple of ECB policymakers are becoming wary of the EUR/USD rally. On Tuesday, Vice President Luis De Guindos cautioned that EUR/USD gains beyond 1.2000 “would be much more complicated” while Governing Council member Martins Kazaks warned that further EUR appreciation could tilt the balance toward another cut. We believe the ECB is more concerned about the pace of appreciation than about the level.

EUR/USD is overvalued and trading above our long-term equilibrium estimate of around 1.1100. However, EUR/USD has room to overshoot as the euro can play a greater role in foreign central bank reserves. Historically, 10% to 15% overshoot of equilibrium is not unusual, which would suggest EUR/USD could be stretched between 1.2200 and 1.2800.

SWITZERLAND

USD/CHF is trading heavy near 0.7900. Swiss CPI rise in June. Headline printed at 0.1% y/y (consensus: -0.1%) vs. -0.1% in May while core matched consensus at 0.6% y/y vs. 0.5% in May. The Swiss National Bank (SNB) forecasts headline CPI inflation to average 0% in Q2 before gradually picking-up and stabilizing at 0.7% by Q2 2027.

At the last June 19 meeting, the SNB cut the policy rate 25bps to 0%. Benign inflation pressures mean a negative policy rate cannot be ruled out. The swaps market price-in 70% probability of 25bps cut in the next 12 months. Nevertheless, CHF safe haven status outweighs the drag from the likelihood of negative rates.

JAPAN

USD/JPY is directionless around 143.80. Bank of Japan (BOJ) Board Member Hajime Takata sticks to his hawkish script. Takata said “I believe that the bank is currently only pausing its policy interest rate hike cycle and should continue to make a gear shift after a certain period of ‘wait and see.” The swaps market hardly budge and still price-in 60% odds of a 25bps rate hike by year-end and a total of 50bps of tightening to 1.00% over the next three years.

POLAND

Yesterday, National Bank of Poland (NBP) unexpectedly trimmed the policy rate 25bps to 5.00%. NBP justified the rate cut by noting that it forecasts CPI inflation (4.1% y/y in June) to fall below the upper bound of its 1.5%-3.5% inflation target band in the coming months. PLN retraced all its post NBP meeting losses. Positive real interest rates in Poland continues to offer PLN support.

Governor Glapinski will comment on the rate decision today (2:00pm London). The swaps market is pricing in 100bps of total easing over the next 12 months, followed by another 50bps over the subsequent 12 months that would see the policy rate bottom near 3.50%.