- Hawkish Fed hold, and goldilocks-like US macro backdrop support USD.
- BOE and BOJ poised to hold.
- Australia CPI to keep RBA rate hike bets in play.
USD strengthened last week as higher crude oil prices widened the US’s relative growth outlook advantage over energy-importing economies like Japan and the Eurozone. The main outliers to USD strength were energy-linked currencies – NOK, BRL, COP, and MXN – which benefited from a stronger terms of trade, while KRW outperformed on fading portfolio rebalancing outflows.
This week, a hawkish Fed hold, and a goldilocks-like US macro backdrop can offer USD additional near-term support.
Steady Fed, Firm Growth, Softer Inflation
FOMC policy decision (Wednesday). We expect the FOMC to keep the target range for the funds rate at 3.50%-3.75% for a fifth straight meeting. Fed funds futures price in 38% odds of a 25bps rate increase this week and a total of nearly 50bps of tightening by year-end. Aside from the policy decision, attention will focus on the FOMC vote split and comments around the durability of the inflation threat.
The FOMC voted unanimously to keep rates on hold in June. This time, our base case is a 10-2 vote split, with Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan dissenting in favor of a 25bps hike. The risk is a more hawkish 9-3 outcome if Fed Governor Lisa Cook also join the dissent. All three Fed officials have argued recently that the risks continue to be strongly weighted toward higher inflation with Logan even calling for “modestly higher interest rates.”
US Q2 advanced GDP (Thursday). Real GDP is expected at 2.1% SAAR vs. 2.1% in Q1 underpinned by consumer spending and AI-related business investment. That would keep growth modestly above trend of 2%. Model based estimates for Q2 growth vary widely, with the Atlanta Fed GDPNow at 1.7%, the New York Fed GDP Nowcast at 2.8%, and the S&P Global PMI pointing to growth closer to 1.2%.
US June PCE (Thursday). Headline PCE is seen declining -0.1% m/m vs. +0.4% in May due to lower gasoline price, while the annual rate is expected to ease to 3.7% vs. 4.1% in May. Core PCE is expected to rise +0.2% m/m vs. +0.3% in May, and the annual rate is forecast to ease to 3.3% vs. 3.4% in May. The FOMC 2026 median projection for headline and core PCE inflation are 3.6% and 3.3%, respectively.
The rebound in gasoline prices points to renewed inflation pressures. However, US wage growth is consistent with the Fed’s 2% target given average annual labor productivity growth of 2.1%. In fact, the Employment Cost Index (ECI) wages & salaries - the Fed’s favorite wage data – was 3.4% y/y in Q1 or 1.3% y/y adjusted for productivity growth (3.4% - 2.1%). ECI Q2 print is due on Friday.
BOE Set to Hold, QT in Focus
Bank of England (BOE) policy decision and Monetary Policy Report (MRP) (Thursday). The BOE is widely expected to keep the policy rate at 3.75% for a fifth straight meeting. The less worrisome UK inflation backdrop gives the BOE room to stand pat. Cooling wage growth signal softer services inflation ahead while the BOE’s DMP business survey of inflation expectations eased in July.
The vote split should remain 7-2 in favor of no change, suggesting a high bar to start lifting rates. At the last June 18 meeting, the MPC voted by a majority of 7-2 to keep rates on hold. Megan Greene and Huw Pill supported a 25bps hike. Catherine L Mann leaned for a hike but ultimately decided a rate hike could wait because financial market conditions had tightened considerably.
The MPR will include fresh economic projections and a review of the past year’s quantitative tightening (QT). BOE policymakers will vote on QT at the September 17 meeting. The BOE is currently running down its gilt holdings by £70bn over October 2025 to September 2026 (£21bn is through gilt sales and the rest maturing gilts), taking the Asset Purchase Facility (APF) stock to about £488bn from a peak of £895bn at the turn of 2022.
We expect the BOE to flag a further reduction to the pace at which it shrinks its APF holdings because a much smaller volume of maturing bonds is in the pipeline next year: £31bn between October 2026 to September 2027 vs. £49bn between October 2025 to September 2026.
Regardless, a slower pace of BOE balance sheet runoff is unlikely to offset the upward pressure on gilt yields from fiscal policy uncertainty. Prime Minister Andy Burnham leans towards higher spending and borrowing, but the details of his fiscal plan may not emerge until the October budget.
GBP risks remain skewed to the downside in part because BOE rate hike pricing is too aggressive. The swaps curve implies 75bps of tightening to 4.50% in the next twelve months. That would leave the policy rate above the BOE’s estimated neutral range (2.00%-4.00%) when the UK economy is operating well below potential.
BOJ Set to Hold
Bank of Japan (BOJ) policy decision and Outlook Report (Friday). The BOJ is widely expected to keep the policy rate at 1.00% after delivering a well-telegraphed 25bps hike in June. Inflation is running below the bank’s 2% target.
The swaps curve price in a 25bps rate hike by year-end and a total of 60bps of tightening to between 1.50% and 1.75% over the next twelve months. That would still leave the policy rate near the middle of the BOJ’s estimated neutral range (1.10%-2.50%) while the economy operates above potential.
USD/JPY surged to near a 40-year high last week underpinned by firmer crude oil prices. Absent the renewed oil shock, Japan’s macro backdrop would favor a firmer JPY.
Eurozone Growth and Inflation Check
Eurozone Q2 GDP (Thursday). Real GDP is projected to rise 0.2% q/q vs. 0.0% in Q1 consistent with the recovery in leading indicators like the PMI and ZEW. Germany’s IFO business climate index is also poised to improve in July (Monday). The ECB projects real GDP growth to average 0.8% in 2026 with risk skewed to the downside as renewed disruption of energy supplies would weigh on real incomes, spending, and investment.
Eurozone July preliminary CPI (Friday). Headline CPI is expected at 2.9% y/y vs. 2.8% in June, while core CPI is seen at 2.4% y/y for a second straight month. The ECB’s baseline 2026 forecasts for headline and core CPI are 3.0% and 2.5%, respectively, with inflation risks tilted to the upside.
Bottom line: a recovery in Eurozone economic activity and above target inflation will likely reinforce the case for the ECB to resume raising rates in September. That’s unlikely to offer EUR much upside traction as the swaps curve already price in 90% odds of a 25bps rate hike at the September 10 meeting. The next key support for EUR/USD is at 1.1335, the June 24 low.
Above Target Inflation to Keep RBA Hikes in Play
Australia June and Q2 CPI (Wednesday). Headline CPI is expected at 4.0% y/y for a second straight month while trimmed mean CPI is expected at 3.7% y/y vs. 3.6% in May. The monthly CPI is Australia’s primary measure of inflation, but the RBA continues to focus on measures of underlying inflation from the quarterly CPI. Trimmed mean CPI is seen rising to a two-year high at 3.7% y/y in Q2 vs. 3.5% in Q1, keeping RBA rate hike bets live.
Speeches by RBA Governor Michele Bullock (Tuesday) and Assistant Governor Sarah Hunter (Thursday) may provide some policy guidance ahead of the next RBA decision on August 11.
RBA cash rate futures price-in 30% odds of a 25bps hike in August and fully price one to 4.60% by year end. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle which is a headwind for AUD: (i) RBA projects real GDP growth to be below potential over the next two years; (ii) RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate.
Elsewhere…
Chile’s central bank (Tuesday) is widely expected to keep the policy rate on hold at 4.50% for a fifth straight meeting. Colombia’s central bank (Friday) is seen raising rates 50bps to 12.50% after delivering 275bps of tightening so far this year. Core inflation is above 6% y/y and moving further away from the bank’s 3.0% target. China’s July PMIs (Friday) are expected to show that economic activity is broadly stagnant.
