- US CPI and retail sales to shape rate hike bets. Warsh’s testimony is a wild card.
- Bank of Canada to stand pat.
- Bank of Korea to start raising rates.
USD traded mixed last week, underperforming mostly versus KRW, BRL, and NZD. KRW rally mirrored the KOSPI stock index decline, BRL continued to benefit from high positive real interest rates, and NZD was lifted by the RBNZ’s hawkish hike.
In our view, USD can edge a little higher against most currencies in the next couple of months. Stabilizing US labor market conditions and sticky inflation will keep Fed funds rate pricing hawkish. Fed funds futures more than fully price in a 25bps rate hike to a target range of 3.75-4.00% by year-end and nearly 50bps of tightening in the next twelve months
This week’s US June CPI and retail sales data will help shape near-term Fed funds rate expectations. Fed Chair Kevin Warsh’s testimony before Congress will add another layer of volatility as markets scrutinize his assessment of the inflation outlook and policy path.
Sticky US Inflation Meets Warsh
June CPI is due Tuesday. Headline CPI is expected to fall -0.1% m/m vs. 0.5% in May on lower gasoline prices, to be up 3.8% y/y vs. 4.2% in May. Core CPI is seen rising 0.2% m/m and print at 2.9% y/y for a second straight month. Overall, the disinflation trend has stalled even when looking at CPI measures which filter out extreme price swings, like trimmed mean, median, sticky, and super core.
June PPI (Wednesday) and July University of Michigan sentiment survey (Friday) will round out the inflation picture, while the Fed Beige Book (Wednesday) will offer fresh anecdotal insights on US economic activity.
June retail sales report is due on Thursday. Total retail sales are expected at 0.3% m/m vs. 0.9% in May as a World Cup related spending boost offsets lower receipts at gas stations. The more policy relevant control-group sales - which exclude cars, gas, food services, and building materials – is seen rising 0.5% m/m vs. 0.7% in May, consistent with resilient consumer spending activity.
There are plenty of FOMC speakers this week, with the spotlight on Fed Chair Kevin Warsh’s testimony before Congress (Tuesday and Wednesday). Warsh is expected to reaffirm the Fed’s unwavering commitment to its 2% inflation target, supporting a higher for longer policy stance. Congress may also press Warsh on his five task forces and what it could mean for the future conduct of monetary policy.
BOC to Bide its Time
The Bank of Canada (BOC) is widely expected to keep the policy rate on hold at 2.25% for a sixth consecutive meeting (Wednesday). The BOC will also publish its July Monetary Policy Report. We expect the BOC to signal that it’s in no rush to start raising rates.
Leading indicators point to a soft labor market, most firms still report ample spare capacity, and underlying inflation is contained around the bank’s 2% target. Bottom line: there is room for BOC rate hikes bets (50bps in the next twelve months) to adjust lower against CAD.
BOK Eyes Rate Liftoff
Bank of Korea (BOK) is widely expected to raise the policy rate 25bps to 2.75% after keeping rates on hold the past year (Thursday). South Korea real GDP growth (3.8% y/y in Q1) and core inflation (2.5% y/y in June) are tracking above the BOK’s 2026 projection of 2.6% and 2.4%, respectively.
KRW has outperformed all major currencies, mirroring the KOSPI stock index underperformance since its peak on June 19. The logic is that as Korean equities underperform and their weight in global portfolio declines, the need for foreign investors to trim positions and repatriate funds diminishes, reducing KRW outflows. By the same token, should the KOSPI regain leadership the rebalancing outflows are likely to re-emerge against KRW.
Beyond rebalancing dynamics, the outlook for KRW is encouraging. The currency is significantly undervalued (11% undervalued based on deviation from real effective exchange rate trend), and the BOK is on track to start raising rates this week.
Meanwhile, the South Korean government confirmed it will unveil its “roadmap for won internationalization” end-July. The launch of 24-hour onshore KRW trading on July 6 marked the first major step. Over time, greater international use of KRW should increase underlying demand for the currency.
China Growth Check
China Q2 real GDP print is due Wednesday. Real GDP is seen at 0.9% q/q vs. 1.3% in Q1, tracking China’s 4.5% to 5% 2026 growth target. China’s growth target is a government-set growth goal used as a policy tool to guide economic/social planning rather than a reflection of underlying supply and demand dynamic. That means the quality and sources of China’s growth is more relevant for investors.
From that perspective, China’s economy remains structurally over-reliant on investment facilitated by high household savings. As such, continued CNH appreciation can help the country stimulate consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
