- Light US data calendar to keep USD rangebound. August PMIs worth watching.
- Strong Japan Q2 real GDP growth upside risk for JPY.
- Canada faces 50% US tariff hit. Riksbank and BI to hold.
The USD index (DXY) traded on the defensive last week near the lower end of this month’s tight 99.50-100.00 range. The run of soft US July economic data (poor non-farm payrolls, cooling inflation, and dismal retail sales) raised the bar for Fed tightening. The implied odds of a 25bps Fed rate hike in September dropped to 30%, the lowest since the June 17 FOMC decision. That kept USD in check and lifted financial market risk appetite.
There are few major data releases this week to trigger a material USD breakout. At the margin, Friday’s set of global PMIs for August could lend USD some support if they show the US growth lead widening.
FOMC Minutes: Hawkish but Stale
The FOMC minutes of the July 28-29 meeting (Wednesday) are likely to strike a hawkish tone and reveal how far support for a rate hike extended beyond the three dissenters (Beth Hammack, Neel Kashkari, and Lorie Logan). Still, the recent string of soft US data will leave the minutes looking somewhat dated.
Instead, the minutes will offer valuable insights into the FOMC’s thinking on bigger policy themes: (i) the legacy of five years of high inflation, (ii) the economic impact of recent supply shocks, (iii) whether AI-related price pressures are narrow or part of a broader inflation dynamic, (iv) and how much accommodation the balance sheet is still providing.
Japan Growth and Inflation in Focus
USD/JPY has retraced 50% of its intervention-driven drop since July 30. The narrative is the Bank of Japan (BOJ) needs to tighten more aggressively for USD/JPY to sustain a move lower. That’s only part of the story. US-Japan 2-year rate differentials narrowed sharply in 2025 as the BOJ raised rates while the Fed was cutting, yet USD/JPY edged higher.
The divergence is largely explained by an increase in Japan’s fiscal risk premium. Market concerns over Japan fiscal profligacy have since stabilized, reflected by the consolidation in the 10-year JGB term premium.
Stronger Japan economic activity can further calm fiscal concerns by keeping the debt-to-GDP ratio on a downward trajectory, while strengthening the case for the BOJ to quicken the pace of normalization. Japan’s Q2 real GDP (Monday) is projected to rise 0.5% q/q vs. 0.5% in Q1, with the Tankan business survey pointing to upside risk.
Japan July CPI (Friday) is also poised to keep the BOJ on a tightening path. Headline CPI is expected at 1.9% y/y vs. 1.6% in June, core CPI ex. fresh food is expected at 1.8% y/y vs. 1.6% in June, and core CPI ex. fresh food & energy CPI is expected at 1.9% y/y vs.1.7% in June.
UK Wage-Price Showdown
Signs the UK disinflation trend is gaining traction, following the recent solid Q2 real GDP print, would improve the growth-inflation mix and underpin GBP vs. USD and EUR. However, ample spare capacity in the UK economy leaves room for markets to trim BOE rate hike bets (60bps in the next twelve months) and argues against a sustained GBP rally.
UK June labor market to show wage growth slowing (Tuesday). The unemployment rate is expected to dip to 4.8% vs. 4.9% in May and the policy-relevant private sector regular pay growth is seen slowing to 2.8% y/y vs. 2.9% in May. If so, both data would match the Bank of England’s forecast.
UK July CPI to show underlying inflation easing (Wednesday). Headline CPI is expected at 2.9% y/y (BOE projection: 2.8%) vs. 2.6% in June, core CPI is seen at 2.5% y/y vs. 2.6% in June, and services CPI is projected at 3.4% (BOE projection: 3.4%) vs. 3.6% in June.
UK July retail sales are set for payback after two unusually strong months (Friday). Total retail sales volumes are expected to fall -0.4% m/m vs. 1.0% in June. Excluding automotive fuel, retail sales are seen down -0.5% m/m vs. 1.1% in June.
Canada: CPI and Tariffs Take the Spotlight
Canada July CPI to show underlying inflation contained under 2% (Monday). Headline CPI is seen at 2.9% y/y vs. 2.8% in June, core CPI (ex. food & energy) is expected at 1.8% y/y vs. 1.8% in June, and core CPI (average of trim and median) is projected at 1.85% for a second straight month. For reference, the BOC projects headline CPI at 2.5% y/y, and core CPI (average of trim and median) at 2.0% y/y over Q3.
On Wednesday, unless trade talks yield a breakthrough, the US will impose 50% tariffs on nearly $20 billion in imports from Canada (0.85% of Canada’s GDP). The tariff would apply to a range of products from wine to hockey sticks to cement. The tariff will not apply to energy, potash, products subject to tariffs under Section 232, and other goods like fish or critical minerals.
Bottom line: core inflation anchored below the Bank of Canada’s (BOC) 2% target and ongoing US-Canada trade friction support an extended BOC pause. As such, there is room for BOC rate hikes bets (65bps in the next twelve months) to adjust lower against CAD.
Riksbank: Hawkish Hold
The Riksbank is widely expected to keep the policy rate at 1.75% for a 7th consecutive meeting (Thursday). Importantly, the Riksbank will likely keep the door open for a rate hike later this year because inflation is tracking above its projection. In July, Sweden CPIF was 0.7% y/y vs. Riksbank’s forecast of 0.5%, while CPIF ex-energy was 0.6% y/y vs. Riksbank forecast of 0.2%.
Nonetheless, with inflation still well below the 2% target, the bar for a hawkish Riksbank repricing is high which is a headwind for SEK. The swaps curve continues to fully price in a 25bps hike to 2.00% in December.
Australia’s Labor Market Doubleheader
Australia Q2 wage price index (Wednesday) and July labor force survey (Thursday) are unlikely to shift the dial on RBA rate pricing. Wages are expected to rise 0.8% q/q for a third straight quarter and dip to 3.2% y/y vs. 3.3% in Q1. The RBA projects wage growth of 3.3% y/y in Q2. Meanwhile, the economy is forecast to add +12k jobs vs. +76.3k in June and the unemployment rate is seen unchanged at 4.4% for a third straight month.
RBA cash rate futures imply 60% odds of one final 25bps hike by year end to 4.60%. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle because policy is already somewhat restrictive. Still, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.
BI to Stay Put
Bank Indonesia (BI) widely expected to keep rates on hold at 5.75% for a second straight meeting (Wednesday). BI can afford to pause after delivering 100bps of tightening since May. The slump in IDR eased, and inflation remains within the bank’s 1.5%-3.5% target range.
The meeting will mark Destry Damayanti’s debut as BI governor. Previously, Destry was the top deputy to former Governor Perry Warjiyo who unexpectedly resigned last month for “personal reasons,” two years ahead of the end of his second five-year term.
