The dollar is trading softer as geopolitical tensions ease. DXY is trading lower for the third straight day near 98.072 after Israel and Iran agreed to a ceasefire (see below). We target the June 12 low near 97.602 after we got a bearish engulfing pattern yesterday that points to further losses. The same pattern was seen for the euro, which is trading higher near $1.16 and on track to test the June 12 cycle high near $1.1630. Similarly, sterling is trading higher near $1.3605 and on track to test the June 13 cycle high near $1.3630. Lastly, USD/JPY has more than reversed yesterday’s spike and is trading lower near 145.10. While the dollar will see a modest haven bid from time to time given Middle East tensions, we believe the fundamental dollar downtrend remains intact. With recent US data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold last week. Indeed, some Fed officials are pushing back against Powell already (see below). Market repricing of Fed easing along with fading risk off impulses should open up dollar downside again.
AMERICAS
Risk off impulses are fading after a ceasefire was announced. Both Israel and Iran have agreed to the truce, but it is an uneasy one as there have already been accusations of a breach. Brent crude oil prices plunged below $68 earlier after hitting a multi-month high yesterday near $81.40. Global equity markets are rallying, and the dollar slumped across the board to recent cyclical lows. Assuming the ceasefire holds, the fundamental downtrend in USD should reassert itself.
Powell begins his semiannual testimony to Congress. He appears before the House Committee on Financial Services today and then appears before the Senate Banking Committee tomorrow. With global uncertainty still high, we expect him to take a similar tone to his post-decision press conference last week. Powell was surprisingly hawkish then, and the prospects of higher oil prices only adds to upside inflation risks. The key takeaway was the Fed is not inclined to cut rates until it can judge the degree of tariff pass-through, something that hasn’t been felt yet.
Other Fed officials are sounding more dovish. Governor Bowman said “Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.” She added that “the data have not shown clear signs of material impacts from tariffs and other policies. I think it is likely that the impact of tariffs on inflation may take longer, be more delayed, and have a smaller effect than initially expected, especially because many firms front-loaded their stocks of inventories.” Bowman had been one of the stauncher hawks, as was Waller. Now both are talking about a July cut and so markets have taken notice. Elsewhere, Chicago Fed President Goolsbee said “The surprise has been that, so far at least, we’ve had three months of inflation data where there hasn’t been much inflation.” He added that “If we do not see inflation resulting from these tariff increases, then, in my mind, we never left what I was calling the golden path. If the dirt is out of the air, then I think we should proceed.”
We still think July is too soon for a cut, barring a complete collapse in hiring or growth. However, these comments suggest markets are underestimating the risks of a cut then. Odds of a July cut have risen to nearly 25% vs. 15% at the start of this week, while September is now nearly priced in vs. 80% at the start of this week. September seems like a good bet now but July remains a long shot, at least for now. Hammack, Williams, Kashkari, Collins, Barr, and Schmid speak today.
S&P Global preliminary June PMIs were firm. Manufacturing came in a full point higher than expected at 52.0 and was steady vs. May, services came in a tick higher than expected at 53.1 vs. 53.7 in May, and the composite index came in at 52.8 vs. 52.2 expected and 53.0 in May. Of note, the ISM readings were weaker than S&P Global in May, with the ISM composite PMI falling to 49.8. June ISM PMIs will be reported next week and we shall see if this divergence with S&P Global can continue.
Conference Board reports June consumer confidence. Headline is expected at 99.8 vs. 98.0 in May. If so, it would be the second straight month of improvement to the highest since February. However, the sentiment data no longer appears to be a reliable indicator of future spending behavior. Keep an eye on the labor index (jobs plentiful minus jobs hard to get). In May, this fell to an 8-month low of 13.2 vs. 13.7 in April, indicative of weakening labor market conditions.
Regional Fed surveys for June will continue rolling out. Philly Fed services survey will be reported, as well as Richmond Fed manufacturing and services surveys. So far for June, these regional surveys have been coming in weaker than expected.
Canada highlight will be May CPI data. Headline is expected to remain steady at 1.7% y/y, while core median is expected to fall two ticks to 3.0% y/y and core trim is expected to fall a tick to 3.0% y/y. The Bank of Canada is concerned that “underlying inflation could be firmer than we thought.” As such, the May CPI print will be a key driver of BOC rate expectations. The swaps market is pricing in 40% odds of a 25 bp cut at the next meeting July 30. Looking ahead, the swaps market is pricing in 25 bp of total easing over the next 12 months that would see the policy rate bottom at 2.50%.
Brazil central bank minutes will be released. At last week’s meeting, the bank unexpectedly hiked rates 25 bp to 15.0% but signaled that the tightening cycle has likely ended. The swaps market sees around 33% odds of one more 25 bp hike over the next six months. The bank said “If the expected scenario materializes, the Committee foresees an interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts.” The bank added that it will “evaluate whether the current interest rate level, assuming it’s stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target.” The bank releases its quarterly monetary policy report Thursday. Brazil also reports mid-June IPCA inflation data Thursday. Headline is expected at 5.31% y/y vs. 5.40% in mid-May. If so, it would be the second straight month of deceleration but would remain above the 1.5-4.5% target range.
Mexico reports mid-June CPI data. Headline is expected at 4.51% y/y vs. 4.62% previously, while core is expected at 4.16% y/y vs. 4.15% previously. If so, headline would fall for the first time since April but would remain above the 2-4% target range. Banco de Mexico meets Thursday and is expected to cut rates 50 bp to 8.0%. At the last meeting May 15, Banco de Mexico cut rates 50 bp for the third straight meeting to 8.5% and added that “The Board estimates that looking ahead it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The decision was unanimous and so the bank seems determined to continue cutting rates despite upside risks to inflation. The swaps market is pricing in 100 bp of total easing over the next 12 months that would see the policy rate bottom near 7.5%.
EUROPE/MIDDLE EAST/AFRICA
German June IFO survey was firm. Headline came in at 88.4 vs. 88.0 expected and 87.5 in May and was the highest since May 2024. Both current assessment and expectations rose to 86.2 and 90.7, respectively, with expectations the highest since April 2023. IFO President Clemens Fuest noted that “Expectations brightened in particular. The German economy is slowly building confidence.” July GfK consumer confidence will be reported Thursday and is expected at -19.2 vs. -19.9 in June. With the eurozone economy on the mend, the ECB is nearing the end of its easing cycle. The swaps market is pricing in one more 25 bp cut over the next 12 months.
U.K. CBI reported a soft June industrial trends survey. Orders fell to -33 vs. -28 expected and -30 in May and was the lowest since January, while selling prices fell to 19 vs. 25 expected and 26 in May and was the lowest since February. CBI reports its June distributive trades survey Thursday. Softening data sets up a cut at the next meeting August 7, when there are nearly 85% odds seen of a cut. Looking ahead, the swaps market is pricing in 75 bp of total easing over the next 12 months.
National Bank of Hungary is expected to keep rates steady at 6.5%. At the last May 27 meeting, the bank decided unanimously to leave the base rate unchanged at 6.5%, marking the 8th consecutive hold since September 2024. The bank also showed no signs of departing from its hold stance. The bank reiterated that “maintaining tight monetary conditions is warranted” while Governor Varga warned that rates could remain at the current level for a “an extended period.” Nevertheless, the swaps market continues to price in 50 bp of easing over the next six months.
ASIA
USD/JPY has fully retraced its upward spike. Yesterday’s move higher to 148.05 made no sense fundamentally to us and was likely due to positioning skew in a choppy market. As such, we are not surprised that the pair is trading back near 145. Clean break below 144.80 would set up a test of the June 13 low near 142.80.
