The dollar is holding on to modest gains as tariff noise intensifies. DXY is trading slightly higher near 97.588 after Trump announced 50% tariffs on copper and threatened 200% tariffs on pharmaceuticals (see below). Despite this week’s modest bounce, we believe US protectionist trade policies will continue to weigh on USD. The euro is trading lower near $1.1705, while sterling is trading lower near $1.3585. USD/JPY is trading flat near 146.65. despite higher JGB yields at the super-long end (see below). NZD is trading flat near .60 after RBNZ delivered a dovish hold (see below). While the dollar is enjoying a small measure of stability today, 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. Market repricing of Fed easing along with weaker data and fading risk off impulses should keep the dollar under pressure. Higher tariffs will raise stagflation risks, which is also dollar-negative. Similar to what we saw during Liberation Day, this latest round of tariff noise should herald the next leg down in the dollar.
AMERICAS
President Trump announced 50% tariffs on copper. Commerce Secretary Lutnick said the copper tariff is “likely to be put in place end of July - maybe August 1.” Tariffs on copper had been well telegraphed since February as part of a review under Section 232 of the Trade Expansion Act. Ongoing front-running ahead of the tariffs will continue to put upside pressure on copper prices. Chile is by far the top supplier of refined copper to the US, accounting for over 70% of refined copper imports in 2024. CLP reaction has so far been muted. Trump also warned that tariffs on pharmaceuticals are “going to be tariffed at a very, very high rate, like 200%,” adding that it would be announced soon and take effect after at least a year. Finally, Lutnick signaled more tariff announcements are in the pipeline as “You should expect another 15-20 letters over the next two days, setting down tariff lines for the key driving countries.”
Trump said that the new August 1 tariff deadline won’t be extended. We would only note that this is the third deadline so far. We've enjoyed a 90-day period of relative quiet on the tariff front, punctuated every now and then by a flareup but quiet enough for markets to once again get complacent about the stagflation risks. We think it's gotten to the point where markets are getting a big wake up call, similar to the one on April 9. Tariffs of this magnitude, if implemented, could finally bring about the macro shock that markets have been waiting for.
FOMC minutes will be the highlight. At the July 29-30 meeting, the FOMC voted unanimously to keep the funds target rate unchanged at 4.25-4.50%. Chair Powell reiterated that the Fed was well positioned to wait for greater clarity before considering any adjustments to the policy stance. Indeed, while the 2025 median Fed funds rate projection still implied 50 bp of easing, the distribution of dots was more cautious, with a growing number of officials (7 vs. 4 in March) projecting no rate cuts this year.
Looming tariffs likely dominated the discussions. We expect the Fed was very concerned about potential tariff pass-through into inflation. Indeed, Powell said he expects higher inflation readings imminently. However, we know at least two Fed officials (Waller and Bowman) would prefer to cut sooner rather than later and so the minutes may pick up some of this debate. That said, it’s clear that most Fed officials are comfortable staying in wait and see mode. Odds of a September cut have fallen to around 70%, while October is fully priced in. Looking ahead, the swaps market is pricing in nearly 100 bp of easing over the next 12 months after briefly touching 125 bp last week.
New York Fed June inflation expectations eased slightly. 1-year expectations fell to ticks to 3.0%, while 3- and 5-year expectations were steady at 3.0% and 2.6%, respectively. All three measures remain elevated and if the next round of tariffs are implemented, we suspect inflation expectations will start creeping higher again.
The growth outlook is deteriorating. The Atlanta Fed GDPNow model estimates Q2 growth at 2.6% SAAR vs. 2.5% previously and will be updated today after the data. Elsewhere, the New York Fed Nowcast model estimates Q2 growth at 1.6% SAAR vs. 1.7% the previous week and Q3 at 1.8% SAAR vs. 1.9% the previous week. This model will be updated Friday. These latest readings aren't bad but are decelerating after weeks of strength.
Mexico reports June CPI data. Headline is expected at 4.30% y/y vs. 4.42% in May, while core is expected at 4.21% y/y vs. 4.06% in May. If so, headline would decelerate for the first time since January but would remain above the 2-4% target range. Banxico minutes will be released tomorrow. At that June 26 meeting, the bank cut rates 50 bp to 8.0% but noted that “Looking ahead, the Board will assess further adjustments to the reference rate.” It removed the previous references to additional cuts of “similar magnitudes.” Of note, Deputy Governor Heath dissented in favor of steady rates. The swaps market is pricing in 50 bp of further easing that would see the policy rate bottom near 7.5%. Next meeting is August 7 and we believe it will slow the pace of easing to 25 bp.
EUROPE/MIDDLE EAST/AFRICA
Egypt June CPI inflation cooled. Headline came in at 14.9% y/y vs. 16.8% in May. This was the first deceleration since February. The central bank meets tomorrow and is expected to cut rates 100 bp to 23.00%. We see some risks of another hawkish surprise as inflation remains well above the 10% target for end-2025. At the last meeting May 22, the bank delivered a hawkish surprise and cut rates 100 bp to 24% vs. 200 bp expected and noted that while upside risks to the inflation outlook had eased compared to its April meeting, some risks remain given the “uncertainty regarding global trade protectionism, possible escalation of regional conflicts and higher-than-anticipated pass-through of fiscal consolidation to domestic prices.”
ASIA
Reserve Bank of New Zealand kept rates steady at 3.25%, as expected. It was a dovish hold as it noted that “If medium-term inflation pressures continue to ease as projected, the Committee expects to lower the Official Cash Rate further.” The guidance is in line with the RBNZ projection outlined in May which sees the OCR bottoming at 2.85% in Q1 2026. The RBNZ discussed two options: cutting rates by 25 bp or keeping rates steady. According to the RBNZ, “The case for lowering the OCR at this meeting highlighted weak near-term growth momentum and the risk of prolonged weakness in economic activity from excess caution by households and businesses in the face of economic uncertainty. The case for keeping the OCR on hold at this meeting highlighted the elevated level of uncertainty, and the benefits of waiting until August in light of near-term inflation risks.” The swaps market sees nearly 70% odds of a 25 bp cut at the August 20 meeting, little changed from the odds prior to today’s meeting. There were no new economic projections associated with this meeting, as the next Monetary Policy Statement will be published in August. In our view, the RBNZ is near the end of its easing cycle, which is supportive of NZD. Inflation is within the target band and the OCR is close to the RBNZ mid-point estimate of the neutral range between 2-4%.
China reported mixed CPI and PPI data. CPI came in at 0.1% y/y vs. -0.1% expected and actual in May, while PPI came in at -3.6% y/y vs. -3.2% expected and -3.3% in May. This was the first positive CPI reading since January, but deeper PPI deflation suggests CPI will struggle to stay positive. Overall, China’s economy is struggling to escape a deflationary spiral in large part because consumption spending is too weak. China's consumption-to-GDP ratio is very low at around 40%, due to high household savings, low household income levels, and high levels of household debt.
Bank Negara cut rates 25 bp to 2.75%, as expected. However, the market was split as nearly half the analysts polled by Bloomberg looked for no change. This was the first cut since July 2020. The bank noted that “The balance of risks to the growth outlook remains tilted to the downside, stemming mainly from a slower global trade, weaker sentiment, as well as lower-than-expected commodity production. The reduction in the OPR is, therefore, a preemptive measure aimed at preserving Malaysia’s steady growth path amid moderate inflation prospects.” While we doubt this is the start of a prolonged easing cycle, we believe monetary policy will be determined in large part by how the economy is impacted by the 25% tariffs.
