• July PMI data to guide near-term USD direction.
• ECB, CBTR and BI hold. MNB cut. SARB hike.
• Inflation checks in Canada, NZ, UK, and Japan. Australia jobs on deck.

USD came under pressure last week after softer than expected US June CPI and PPI data trimmed Fed funds rate hike bets. However, USD clawed back some of its losses later in the week as a tech-led global equity market selloff and ongoing disruption to Strait of Hormuz traffic sparked a flight to safety.

USD can gain upside traction this week if the July PMI data reinforces the US economic outperformance story. Otherwise, USD is likely to stabilize at slightly lower levels, barring another bout of risk aversion.

The July PMI readings for the US, Eurozone, UK, and Japan are due on Friday. In June, the US maintained a growth advantage over the Eurozone and UK but saw its edge over Japan disappear.

ECB Pause

The ECB policy decision is Thursday. The ECB is widely expected to leave the policy rate unchanged at 2.25% after delivering a well-telegraphed 25bps hike in June. Eurozone CPI indicators are tracking slightly below the ECB’s baseline forecast while the rebound in energy prices are still traling the ECB’s base case assumption.

The ECB is also poised to stick to its data-dependent, meeting-by-meeting approach without pre-committing to any particular rate path. There are no updated macroeconomic projections associated with this meeting.

The swaps curve fully price in a 25bps hike in September and more than 50bps of tightening over the next twelve months to 2.75%. That would leave the policy rate near the top of the ECB’s estimated neutral range (1.75%-3.00%).

However, tighter monetary policy when the Eurozone economy is still operating below potential is more likely to limit EUR downside than push the currency higher because it raises the likelihood of a downward adjustment to ECB rate expectations.

Inflation Check

Canada June CPI (Monday). Headline CPI is seen at 2.9% y/y vs. 3.2% in May on lower gasoline prices, core CPI (ex. food & energy) is expected at 1.7% y/y vs. 1.6% in May, and core CPI (average of trim and median) is projected to remain at 2.05% for a third straight month.

Core inflation remains anchored near the Bank of Canada’s (BOC) 2% target, supporting an extended pause which is a headwind for CAD. The swaps curve price in less than 50% odds of a 25bps rate hike by year-end and 50bps of tightening over the next twelve months to 2.75% - the mid-point of the BOC’s estimated neutral range (2.25%-3.25%).

New Zealand Q2 CPI (Monday). Headline CPI is expected at 1.4% q/q (RBNZ projection: 1.6%) vs. 0.9% in Q1 to be up 4.0% y/y (RBNZ projection: 4.2%) vs. 3.1% in Q1. Above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes which is NZD supportive.

At its last July 8 meeting, the RBNZ raised the Official Cash rate (OCR) 25bps to 2.50%, the first hike in three years, and indicated that “further OCR increases appear likely at upcoming meetings.” The swaps curve price in 50bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% - near the top of the RBNZ estimated neutral range (2.20%-4.10%).

UK June CPI (Wednesday). Headline CPI is expected at 2.7% y/y (BOE projection: 3.1%) vs. 2.8% in May, core CPI is seen at 2.5% y/y vs. 2.6% in May, and services CPI is projected at 3.5% (BOE projection: 3.6%) vs. 3.7% in May. Sticky services inflation above 3% underscores hawkish BOE rate pricing.

The swaps curve implies nearly 50bps of BOE rate rise to 4.25% by year-end which would leave the policy rate above the BOE’s estimated neutral range (2.00%-4.00%).

Restrictive monetary policy when the UK economy is operating well below potential raises the likelihood of a downward adjustment to BOE rate expectations against GBP. Moreover, the prospect of higher spending and borrowing under incoming Prime Minister Andy Burnham risks worsening UK fiscal credibility and is a drag on GBP.

Japan June CPI (Thursday). Headline CPI is expected at 1.7% y/y vs. 1.5% in May, core CPI ex. fresh food is expected at 1.6% y/y vs. 1.4% in May, and core CPI ex. fresh food & energy CPI is expected to print at 1.8% y/y for a second straight month.

The swaps curve price in a 25bps Bank of Japan (BOJ) rate hike by year-end and a total of 50bps of hikes to 1.50% over the next twelve months. That would still leave the policy rate closer to the lower-end of the BOJ’s estimated neutral range (1.10%-2.50%). Loose monetary policy when Japan’s economy is operating above potential raises the likelihood of an upward adjustment to BOJ rate expectations in favor of JPY.

Australia Jobs on Deck

Australia June labor force survey (Thursday). The economy is projected to add +15k jobs vs. +40.3k in May and the unemployment rate is seen unchanged at 4.4% for a second straight month. That would be marginally higher than the RBA’s June unemployment rate projection of 4.2% and support the case for an extended pause to the bank’s tightening cycle.

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 which is a headwind for AUD. First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate.

EM Central Bank Watch

National Bank of Hungary (MNB) policy decision is Tuesday. MNB is widely expected to deliver a follow-up 25bps rate cut to 5.75% after flagging in June it “sees room for further interest rate cuts throughout the summer.” Indeed, headline and core CPI inflation are contained near the bottom of the bank’s 3%+/-1% target. The euro-convergence trade will continue to be an important structural tailwind for HUF. Hungary’s government plans to meet euro adoption conditions by 2030.

Bank Indonesia (BI) policy decision is Wednesday. BI is expected to keep rates on hold at 5.75% after delivering three straight 25bps of hikes since May. However, the decision is a close call with many analysts calling for a 25bps hike to 6.00%. We think BI can afford to stand pat because the slump in IDR eased, and inflation remains within the bank’s 1.5%-3.5% target range.

South African Reserve Bank (SARB) policy decision is Thursday. SARB is widely expected to deliver a follow-up 25bps rate hike to 7.25% as core CPI inflation is tracking modestly above the bank’s Q2 forecast of 3.6%. The swaps curve price in nearly 75bps of hikes in the next twelve months. That’s too aggressive given the economy is operating below capacity and the policy rate is already above the SARB’s estimate of the neutral rate (5.80%).

Türkiye central bank (CBTR) policy decision is Thursday. CBTR is widely expected to keep rates on hold at 37.00% for a fourth straight meeting to steer inflation back toward its year-end forecast of 26% y/y.