• .Last week’s calm has carried over into this week; it's clear that the Fed is not in any hurry to cut rates; NY Fed reports July inflation expectations
  
• This is a big data week for the U.K.; Czech Republic reported July CPI
  
• The BOJ has successfully pushed out expectations for further tightening; India reports July CPI and June IP

The dollar is treading water ahead of key U.S. data this week. With no data nor major developments until tomorrow, DXY is trading flat 103.174. CHF and JPY are underperforming, with USD/JPY trading back above 147 and EUR/CHF trading at the highest since August 1 near 0.95. Sterling is trading flat near $1.2760, while the euro is trading slightly higher near $1.0930. While the Fed is widely expected to cut rates in September, we continue to believe that markets are overreacting to the recent softness in the U.S. data. Looking at the totality of the data, the economy is still growing above trend and suggests the market is once again getting carried away with its pricing for aggressive easing (see below). We continue to believe that the divergence story remains in place and should continue to support the dollar. However, it will likely take weeks for the current market narrative to run its course. This week’s retail sales and inflation data will be key.

AMERICAS

Last week’s calm has carried over into this week. JPY and CHF are underperforming today, while global bond yields and equity markets are edging higher. With very little data today, markets are continuing last week’s trends ahead of key U.S. data releases that kick off tomorrow with PPI, followed by CPI Wednesday and retail sales Thursday. We continue to believe that markets overreacted last week, and that this week’s data should show a relatively healthy U.S. economy that belies the aggressive market pricing for Fed easing. If and when we see the repricing, the dollar should recover further.

The Fed is sticking to its message. Over the weekend, Fed Governor Bowman followed suit, noting that the recent jump in unemployment to 4.3% in July may be exaggerating the degree of labor-market cooling. She added that “The progress in lowering inflation during May and June is a welcome development, but inflation is still uncomfortably above the committee’s 2% goal. I will remain cautious in my approach to considering adjustments to the current stance of policy.” Other Fed speakers are likely to maintain this cautious tone this week. Bostic speaks tomorrow. Musalem and Harker speak Thursday. Goolsbee speaks Friday.

It's clear that the Fed is not in any hurry to cut rates. The notion of an intra-meeting cut seems very unlikely and so we continue to see the first cut at the September 17/18 FOMC meeting. A 50 bp cut is possible but will fully depend on the data, with around 55% odds priced in now. The market is still fully pricing in 100 bp of easing by year-end, as well as 175-200 bp of total easing over the next 12 months. Unless the U.S. economy falls into a deep recession, this rate path still seems unlikely. However, we cannot stand in the way of this dovish narrative until we see more data.

The New York Fed reports July inflation expectations. Last month, 1-year expectations fell to 3.0% vs. 3.2% in May, 3-year expectations rose to 2.9% vs. 2.8% in May, and 5-year expectations fell to 2.8% vs. 3.0% in May. The Fed will be happy to see expectations generally falling, though all readings remain well above the Fed's 2% target. This is another reason for the Fed to stay patient.

EUROPE/MIDDLE EAST/AFRICA

This is a big data week for the U.K. Data that would normally be reported over the course of two weeks will all be reported this week. Labor market data will be reported tomorrow, followed by July CPI Wednesday. Monthly real sector data will be reported Thursday along with Q2 GDP, followed by July retail sales data Friday. On the whole, the data are expected to show the recovery continuing along with easing wage and price pressures. This should allow the BOE to continue a cautious easing cycle. The market sees 40% odds of a cut at the next meeting September 19 but becomes fully priced in for November 7.

Czech Republic reported July CPI. Headline picked up a tick more than expected to 2.2% y/y vs. 2.0% in June. This was the first acceleration since April, but inflation remains well within the 1-3% target range. Central bank minutes showed that the weak koruna was a major factor behind the smaller 25 bp cut on August 1 after four straight 50 bp cuts. Some board members highlighted persistent services inflation while other saw inflationary risks from fiscal policy next year. However, all agreed that downside risks to growth had increased substantially and due partly by the slowdown in the German economy. Next policy meeting is September 25 and another 25 bp cut is likely. Looking ahead, the market is pricing in 100 bp of easing over the next 12 months.

ASIA

The Bank of Japan has successfully pushed out expectations for further tightening. The market is pricing in only 30% odds of a hike by year-end vs. two hikes fully priced in right after the July 31 decision. Only 20 bp of total tightening is priced in over the next 12 months, and only 35 bp to total tightening over the next three years. In turn, this has helped inject some calm into global markets. USD/JPY continues to edge higher and has retraced over a third of its post-decision plunge. Key retracement objectives to watch are 148.45 (50%) and 150.05 (62%).

India reports July CPI and June IP. Headline is expected at 3.60% y/y vs. 5.08% in June. Elsewhere, IP is expected at 5.4% y/y vs. 5.9% in May. Last week, the Reserve Bank of India delivered a hawkish hold. The vote was 4-2 to keep rates on hold, with the dissents in favor of a 25 bp cut. The bank also voted to keep its stance at “withdrawal of accommodation.” Governor Das warned that the bank “has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.” Because of the hawkish stance, the swaps market is pricing in steady rates over the next three months. However, this is followed by 25 bp of easing over the subsequent three months followed by another 25 bp over the subsequent six months.