The dollar was mostly firmer against the majors last week on growing risk off impulses. Along with USD, the havens JPY and CHF outperformed while the growth-sensitive dollar bloc and Scandies underperformed. JPY outperformance was also underpinned by expectations of a more aggressive BOJ tightening cycle. Additionally, the unwind in yen carry-trades may have turbo-charged the sell-off in higher-yielding cyclical-sensitive currencies like AUD and NZD. This week will be key, with the FOMC and BOJ decisions Wednesday and the jobs report Friday likely to determine the near-term outlook for the dollar.

AMERICAS

This is an incredibly jam-packed week. The FOMC is expected to keep rates on hold Wednesday but open the door for a September cut. Meanwhile, the July jobs report will remain consistent with a labor market coming into better alignment whilst still supporting consumption. JPY will likely struggle to gain further upside momentum as we anticipate the BOJ to deliver a dovish hike Wednesday, while GBP faces downside risk as the BOE is expected to start easing Thursday.

Beyond the short-term, we remain bullish USD. The “Goldilocks” economic backdrop of solid growth and modest disinflation suggests the Fed is unlikely to cut the funds rate as much as currently priced in. The market is pricing almost 75 bp of easing by year-end and nearly 150 bp of total easing over the next 12 months. If the soft landing remains intact, such aggressive easing won’t be needed. Moreover, rising U.S. productivity can lead to low inflationary economic growth, higher real interest rates, and an appreciation in the greenback over the longer term.

The U.S. economy remains robust even as price pressures continue to ease slowly. Last week’s data (Q2 GDP, July S&P Global PMIs) largely surprised to the upside as global growth divergences remain in place. Looking ahead, the Atlanta Fed’s GDPNow model’s initial estimate for Q3 growth came in at 2.8% SAAR and will be updated Thursday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 2.7% SAAR and will be updated Friday. Its initial estimate for Q4 growth will come at the end of August. Bottom line: above trend growth means the Fed won’t cut rates aggressively.

The two-day FOMC meeting ends Wednesday with a widely expected hold. There is simply no reason for the Fed to cut rates at this meeting when the economy continues to hum along. That said, we believe the Fed will leave the door wide open for a cut at the September FOMC meeting. There will be no updated Dot Plots or macro forecasts at this week’s meeting.

Chair Powell’s press conference is the usual wild card. Before the media blackout period, we saw a clear shift in tone from Fed speakers. In particular, there are growing concerns about softness in the labor market. However, we do not expect Powell to validate the aggressive easing that’s priced in by the markets, and he may in fact push back a bit.

Data highlight will be July jobs report Friday. Bloomberg consensus sees 178k vs. 206k in June, while its whisper number stands at 176k. For reference, the average non-farm payrolls monthly gain over the past 12 months is 220k. The unemployment rate is expected to remain steady at 4.1%, while average hourly earnings are expected to fall two ticks to 3.7% y/y. Ahead of that, ADP reports its private sector jobs estimate Wednesday and is expected at 149k vs. 150k in June.

July PMIs will continue rolling out. Chicago PMI will be reported Wednesday and is expected at 44.5 vs. 47.4 in June. ISM manufacturing PMI will be reported Thursday and the headline is expected at 48.8 vs. 48.5 in June. Keep an eye on prices paid, which stood at 52.1 in June. Of note, the US S&P Global manufacturing PMI fell to a 7-month low at 49.5 in June vs. 51.6 in June. However, services remained strong and so its composite rose to the highest since April 2022 at 55.0.

Other key labor market data will be reported. June JOLTS data will be reported Tuesday and openings are expected at 8.055 mln vs. 8.140 mln in May. Labor supply and demand is coming into better balance. The job openings rate is near pre-pandemic levels at 4.9% and the layoff rate remained unchanged at a low of 1% in May. The data suggests the Fed can achieve a soft landing in the labor market without a material increase in the unemployment rate.

Q2 Employment Cost Index will be reported Wednesday. It is expected at 1.0% q/q vs. 1.2% in Q1.

July Challenger job cuts, Q2 nonfarm productivity and unit labor costs, and weekly jobless claims will be reported Thursday. Productivity (GDP/hours worked) is expected at 1.7% q/q vs. 0.2% in Q1, while ULC is expected at 1.9% q/q vs. 4.0% in Q1. Importantly, annual productivity growth is running above its post-war average of 2.1%. Rising productivity leads to low inflationary economic growth which translates to higher real interest rate and an appreciation in the currency over the longer term.

July Conference Board consumer confidence index will be reported Tuesday. Headline is expected at 99.5 vs. 100.4 in June and would remain roughly within the same narrow range that’s held throughout the past two years. Regardless, positive real wage growth, rising house prices, and encouraging labor demand suggest household spending will remain an important tailwind to GDP growth.

Canada highlight will be May GDP Wednesday. The economy is forecast to grow 0.1% m/m vs. 0.3% in April, but the risks are skewed to the downside because retail sales volume plunged 0.7% m/m in May. Subdued Canadian economic activity and moderating inflation pressures suggest the bar for more Bank of Canada policy rate cuts is low which can further weigh on CAD. Last week, the bank cut rates for the second straight meeting and signaled more to come. The swaps market is pricing over 100 bp of easing over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Eurozone highlight will be July CPI data. Spain and Germany report Tuesday. Spain’s EU Harmonised inflation is expected at 3.3% y/y vs. 3.6% in June, while Germany’s is expected to remain steady at 2.5% y/y. France and Italy report Wednesday. France’s EU Harmonised inflation is expected at 2.7% y/y vs. 2.5% in June, while Italy’s is expected at 1.2% y/y vs. 0.9% in June. Eurozone readings will also be reported Wednesday. Headline is expected to remain steady at 2.5% y/y while core is expected to fall a tick to 2.8% y/y. Overall, Eurozone disinflationary process is well on track and supports the case for the ECB to cut rates again in September and then December.

Eurozone also reports Q2 GDP Tuesday. Growth is expected to slow a tick to 0.2% q/q, while the y/y rate is expected to rise a tick to 0.5%. In q/q terms, German growth is expected to slow a tick to 0.1%, France is expected to remain steady at 0.2%, Italy is expected to slow a tick to 0.2%, and Spain is expected to slow three ticks to 0.5%. The eurozone is limping along in Q3, with the composite PMI falling to 50.1 in July and seems likely to fall below the key 50 boom/bust level in the coming months.

Bank of England meeting ends Thursday with an expected 25 bp cut to 5.0%. However, there is scope for heightened volatility as nearly a third of the 34 analysts polled by Bloomberg see steady rates and the swaps market implies 50/50 odds. We expect the BOE to cut the policy rate 25 bp, in large part because headline CPI inflation has been at the BOE’s 2% target the last two months. Granted, services CPI inflation is still running high at 5.7% y/y, but forward-looking indicators point to a sharp slowdown in H2. In July. Elsewhere, the CBI industrial trends survey showed selling prices plunged to the lowest level since December 2020 while the PMI services input and output cost inflation were the softest in more than three years. Updated macro forecasts will be released this week.

Chancellor of the Exchequer Rachel Reeves will outline the results of an audit of the state of Britain’s finances Monday. She’s expected to detail a near £20 billion funding shortfall for public services that could pave the way for tax increases this year. If so, tighter fiscal policy could reinforce the case for a looser BOE policy stance.

July DMP inflation expectations will also be reported Thursday.

Switzerland reports July CPI and PMIs Friday. Headline is expected to remain steady at 1.3% y/y and core is expected to remain steady at 1.1% y/y. The SNB has scope to ease further as inflation remains well within the bank’s stability range of 0-2%. The swaps market is pricing in 90% odds of a third straight rate cut to 1.00% in September.

Sweden reports Q2 GDP Monday. Consensus sees a flat q/q reading after contracting -0.1% in Q1. Overall, weak economic activity and accelerating sharp slowdown in inflation in June underscore the Riksbank’s guidance that “the policy rate can be cut two or three times during the second half of the year.” The Riksbank’s next policy meeting is August 20 and a 25 bp cut to 3.5% is fully priced in.

ASIA

The two-day Bank of Japan meeting ends Wednesday with an expected hold. However, over a fifth of the 47 analysts polled by Bloomberg see a hike, while the swaps market sees nearly 70% odds of a 10 bp hike. In addition, the bank said it would announce a reduction in its monthly bond-buying at this meeting from JPY6 trln currently. Bloomberg consensus sees a modest reduction to JPY5 trln per month. If policymakers really want to prevent the yen from weakening again, it should deliver a hawkish surprise on both accounts. Updated macro forecasts will be released at this meeting and should also be tweaked to support the case for further tightening. Unfortunately, recent weakness in the economy suggests the BOJ will disappoint this week.

Recent yen strength has been driven by expectations of a hawkish BOJ decision this week. If the BOJ disappoints, then much of that rally will quickly reverse. And even if the BOJ delivers, there is potential for a “buy the rumor, sell the fact” market reaction. Even after this recent yen rally, the market is still only pricing in 70 bp of total tightening over the next three years. If this doesn’t change, there is really nothing supporting the yen.

We would be on the lookout for potential BOJ intervention after the decision. We would be wary of possible intervention after the FOMC decision too, as we saw after the May 1 FOMC decision. Recently, the BOJ has intervened when the yen was already gaining and so we think much will depend on how its monetary policy decision is digested by the markets. The BOJ has intervened twice in July to the tune of around JPY5.6 trln, though official data won’t be available until July 31.

Japan reports key data as well. June labor market data will be reported Tuesday. Both the unemployment rate and job-to-applicant ratio are expected to remain steady at 2.6% and 1.24, respectively.

June IP, retail sales, and housing starts will be reported Wednesday. IP is expected at -6.4% y/y vs. 1.1% in May, sales are expected at 3.2% y/y vs. 2.8% bin May, and starts are expected at -2.4% y/y vs. -5.3% in May.

Australia highlight will be June and Q2 CPI data Wednesday. June headline CPI is expected to fall two ticks to 3.8% y/y. For Q2, headline CPI is expected to rise 1.0% q/q (same as in Q1) and quicken to 3.8% y/y vs. 3.6% in Q1. Trimmed mean CPI is also expected to rise 1.0% q/q (same as in Q1) and remain steady at 4.0% y/y. With inflation is still well above the 2-3% target range, the RBA will not be in any rush to loosen policy. The swaps market projects steady for the rest of this year and a first full 25 bp cut next summer. Q2 PPI will be reported Friday.

Australia also reports Q2 real retail sales data Tuesday. Retail sales volume is expected at -0.2% q/q in Q2 vs. -0.4% in Q1. According to the RBA June meeting minutes, “uncertainty around the data for consumption and clear evidence that many households were experiencing financial stress” were the major reasons it was hesitant to raise the policy rate. June trade data will be reported Thursday.

New Zealand highlight is July ANZ business survey Tuesday. In June, the Own Activity Outlook index stabilized near a 10-month low around 12 and inflation indicators improved. The swaps market implies over 66% odds of the first RBNZ rate cut at the next meeting August 14. We think the RBNZ can afford to wait until October before cutting rates, as non-tradeable CPI inflation remains sticky. In Q2, non-tradeable CPI rose 0.9% q/q, which was higher than the RBNZ’s 0.8% q/q forecast.