US

The dollar’s got swagger, but staying power looks weak. In our view, a sustained USD rebound hinges on 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.

Markets flinched yesterday after word spread that President Donald Trump might fire Fed Chair Jay Powell. Stocks, bonds, and the dollar all dropped. Then Trump said it was “highly unlikely” that he fires Powell and markets calmed down. The episode underscores how political interference with the Fed’s independence can roil financial markets. Moreover, political pressure against Powell adds to market confusion and erodes the Fed’s image as a non-partisan institution. This is not a good for USD.

US June PPI inflation was surprisingly muted. PPI services less trade, transportation, and warehousing, which feeds into the PCE, fell -0.1% m/m vs. 0.1% in May and slowed at an annual pace of 2.6% (lowest since January 2023) vs. 3.0% in May.

We expect the effects of tariffs on inflation to materialize over the second half of the year. The average effective US tariff rate is estimated at 20.6% as of July 14, the highest since 1910. But actual tariffs in effect in recent months are so far much smaller at about 8% in May, up from 2.4% in January.

Indeed, New York Fed President John Williams anticipates “tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year.” Williams added that “the lower foreign exchange value of the dollar we have seen this year likely will add somewhat to inflationary pressure going forward.”

In parallel, the Fed July Beige Book pointed out that “contact in a wide range of industries expected cost pressures to remain elevated in the coming months, increasing the likelihood that consumer prices will start to rise more rapidly by late summer.”

The US June retail sales report is today’s data highlight (1:30pm London, 8:30am New York). Consensus sees headline at 0.1% m/m vs. -0.9% in May. The retail sales control group used for GDP calculations, is projected at 0.3% m/m vs. 0.4% in May. Stronger than expected retail sales growth can offer USD additional short-term support.

A fresh update of the Atlanta Fed GDPNow model will be published later today. As of July 9, the Atlanta Fed GDPNow model estimates Q2 growth at 2.6% SAAR, driven primarily by net exports (+3.45pts). This is not indicative of solid economic activity as it largely reflects a tariff-related plunge in imports.

Pay attention to the weekly jobless claims (1:30pm London, 8:30am New York). That’s because initial claims will be for the BLS survey week containing the 12th of the month. Initial claims are expected at 233k vs. 227k last week. Higher claims would raise the risk of soft non-farm payrolls gains in July.

The May TIC flows will also be of interest (9:00pm London, 4:00pm New York). The US April TIC flows confirmed dwindling appetite for US securities. On a 12-month cumulative basis, foreign investors trimmed their holdings of long-term US securities to a six-month low at $1160bn vs. $1283bn in March. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.

Three Fed Governors speak today: Kugler, Cook, and Waller. Waller is the most dovish, openly backing a July rate cut. Fed funds futures virtually rule-out odds of a July cut. A 25bps cut in September is 58% priced-in while October is fully priced.

UK

GBP/USD is consolidating near a two-month low around 1.3390. The UK May labor market data was mixed. The unemployment rate unexpectedly rose 0.1pts to a four-year high at 4.7% (consensus: 4.6%) and is tracking above the BOE’s Q2 projection of 4.6%. However, the 0.1pts rise in the unemployment rate was outpaced by a 0.2pts increase in the employment rate, suggesting the labor market is roughly in balance.

Meanwhile, UK inflation pressure remains stubbornly elevated. Wage growth slowed less than anticipated. Total regular pay fell 0.3pts to 5.0% y/y (consensus: 4.9%) and the policy-relevant private sector regular pay dropped 0.3pts to 4.9% y/y (consensus: 4.8%, BOE’s Q2 projection: 5.2%).

In our view, the combination of high UK underlying inflation and a sluggish growth outlook spell trouble for GBP. We prefer to be short GBP versus EUR rather than USD in part because the ECB is nearly done easing with one more 25bps cut discounted over the next 12 months. In contrast, the swaps market price-in 90% odds the BOE cuts rate by 25bps in August and by a total of 75bps over the next 12 months.

AUSTRALIA

AUD is underperforming most currencies and Australian bonds are outperforming. Australia’s weak June labor force report reinforces the case the RBA will resume easing at its next meeting in August. The economy added just 2k jobs in June (consensus: 20k) vs. -1.1k in May.

The details challenge the RBA’s view that “labour market conditions remain tight.” Full-time employment fell -38.2k vs. 41.9k in May, hours worked declined -0.9% m/m vs. 1.4% in May, and the unemployment rate unexpectedly rose 0.2pts to 4.3% (consensus: 4.1%, RBA June projection: 4.2%), outpacing the 0.1pts gain in the participation rate.

RBA cash rate futures price-in a full 25bps cut at the next August 12 meeting and a total of 75bps of easing over the next twelve months for the policy rate to bottom around 3.10%.