The dollar was mostly lower against the majors last week. CAD, CHF, and EUR outperformed while SEK, GBP, and NOK underperformed. The greenback ended the week on a firmer note after stronger than expected jobs data led markets to pare back Fed easing expectations. However, this week should bring much higher tariffs that are likely to weigh on the US economic outlook, which in turn should weigh on the dollar.
AMERICAS
There is little in the way of U.S. data this week and so trade news is likely to dominate trading ahead of the end of the tariff pause Wednesday. President Trump announced he would send out tariff notices ahead of the deadline. He said “They’ll range in value from maybe 60 or 70% tariffs to 10 and 20% tariffs.” Trump said letters will be send out each day until the end of the pause, adding that smaller countries would come towards the end. Tariff collections would begin August 1. The situation remains very fluid and we would expect some deals to be announced right up to the Wednesday deadline. Adding to the uncertainty, Treasury Secretary Bessent said some countries will have the option of a three-week extension to negotiate a deal.
FOMC minutes Wednesday will be the highlight. At the July 29-03 meeting, the FOMC voted unanimously to keep the funds target rate unchanged at 4.25-4.50%. Chair Powell reiterated that the Fed was well positioned to wait for greater clarity before considering any adjustments to the policy stance. Indeed, while the 2025 median Fed funds rate projection still implied 50 bp of easing, the distribution of dots was more cautious, with a growing number of officials (7 vs. 4 in March) projecting no change in rates this year.
Looming tariffs likely dominated the discussions. We expect the Fed remain concerned about potential tariff pass-through into inflation. However, we know at least two Fed officials (Waller and Bowman) would prefer to cut sooner rather than later and so the minutes may pick up some of this debate. That said, it’s clear that most Fed officials are comfortable staying in wait and see mode.
Stronger than expected jobs report has pushed out Fed easing expectations. A September cut had been priced in before the data but odds have fallen to around 70%. October is now fully priced in. Looking ahead, the swaps market is pricing in 100 bp of easing over the next 12 months after briefly touching 125 bp last week. Musalem and Daly speak Thursday.
New York Fed June inflation expectations will be reported Tuesday. In May, expectations fell across all three horizons. 1-year inflation expectations declined by 0.4 ppt to 3.2%, 3-year expectations declined by 0.2 ppt to 3.0%, and 5-year expectations declined by 0.1 ppt to 2.6%. With higher tariffs looming, we suspect inflation expectations will start to move higher in the coming months.
The growth outlook is deteriorating. The New York Fed Nowcast model now estimates Q2 growth at 1.6% SAAR vs. 1.7% the previous week and Q3 at 1.8% SAAR vs. 1.9% the previous week. This model will be updated Friday. Elsewhere, the Atlanta Fed GDPNow model now estimates Q2 growth at 2.6% SAAR vs. 2.5% previously. This model will be updated Wednesday. These latest readings aren't bad but are decelerating after weeks of strength.
Canada highlight will be June jobs data Friday. Consensus sees flat job creation vs. 8.8k in May. The unemployment rate is expected rise a tick to near a four-year high of 7.1%. Regardless, sticky underlying inflation in Canada suggests the bar for additional Bank of Canada rate cuts is high. The swaps market is pricing in around 25% odds of a 25 bp cut at the next meeting July 30 and 25-50 bp of total easing over the next 12 months that would see the policy rate bottom between 2.25-2.50%.
EUROPE/MIDDLE EAST/AFRICA
Eurozone officials are recognizing the impact of a stronger euro. The account of the June meeting noted that “Higher tariffs and the recent appreciation of the euro should weigh on exports.” Elsewhere, GC member Villeroy noted that a strong euro “could increase the risk of undershooting our target” and added that “this is a risk we must take into account.” Nagel and Holzmann speak Monday. Nagel speaks again Tuesday. Guindos and Nagel speak Wednesday. Cipollone and Villeroy speak Thursday. Panetta speaks Friday. The market sees only 5% odds of a cut at the next meeting July 24 and only 25 bp of total easing over the next 12 months.
U.K. reports May real sector data Friday. GDP is expected at 0.1% m/m vs. -0.3% in April. Services output was the main drag to growth in April at -0.4% m/m, but is expected to rebound to 0.1% m/m in May. The improvement in the S&P Global Services PMI above the 50 boom/bust level in both May and June points to a recovery in services sector activity. The UK government’s sharp U-turn on welfare reforms means higher taxes are in the pipeline when the next 2025 Autumn Budget is presented in October. Higher taxes, combined with weak underlying UK GDP growth and labor market slack emerging, could force the BOE to cut rates more aggressively than anticipated. The swaps market sees nearly 80% odds of a cut August 7 and 75 bp of total easing over the next 12 months.
Sweden reports June CPI data Monday. Headline is expected to pick up two ticks to 0.4% y/y, while the policy relevant CPIF is expected to pick up two ticks to 2.5% y/y vs. the Riksbank forecast of 2.4%. CPIF ex-energy is expected to pick up four ticks to 2.9% y/y vs. the Riksbank forecast of 2.9%. At the last meeting June 18, the Riksbank cut rates 25 bp to 2.0%, as expected. The bank said “The forecast for the policy rate entails some probability of another cut this year” as it sees the policy rate at 1.92% by Q4 2025 before bottoming at 1.88% by Q1 2026. The swaps market is more dovish, pricing in nearly 50 bp of total easing over the next 12 months that would see the policy rate bottoms near 1.50%. The next Riksbank meeting is August 20 and markets see around 30% odds of a follow-up 25 bp cut then.
Norway reports June CPI data Thursday. Headline is expected to remain steady at 3.0% y/y vs. the Norges Bank forecast of 3.1%, while underlying CPI is expected to pick up two ticks to 3.0% y/y vs. the Norges Bank forecast of 3.1%. At the last meeting June 18, the Norges Bank unexpectedly cut rates 25 bp to 4.25%. The decision was unanimous. No change was expected, with the swaps market pricing in around 5% odds of a cut. The Norges Bank also flagged that “the policy rate will be reduced further in the course of 2025” as “the inflation outlook for the coming year indicates lower inflation than previously expected.” The bank’s new policy rate path implies one 25 bp cut to 4.00% by year-end (vs. 4.25% previously) and the policy rate to bottom around 3.00% by end-2028 (little changed from the previous forecast in March). The next Norges Bank meeting is August 14 and markets see around 30% odds of a follow-up 25 bp cut and a total of 50 bp of cuts by year-end. Looking ahead, the swaps market is pricing in nearly 100 bp of total easing over the next 12 months that would see the policy rate bottom near 3.25%.
ASIA
Japan highlight will be May cash earnings data Monday. Nominal cash earnings are expected at 2.4% y/y vs. 2.0% in April while real earnings are expected at -1.7% y/y vs. -2.0% in April. The less volatile scheduled pay growth for full-time workers is forecast at 2.6% y/y vs. 2.5% in April. Overall, Japan wage growth is not a source of significant inflation pressures given annual total factor productivity growth of about 0.7%. Bottom line: the Bank of Japan will not be in any rush to resume raising rates. The swaps market is pricing in less than 50% odds of a 25 bs rate hike by year-end and 25 bp of total tightening over the next 12 month.
May current account data Tuesday will also be of interest. An adjusted surplus of JPY2.581 trln is expected vs. JPY2.307 trln vs. JPY2.589 trln expected and JPY2.723 trln in March. However, the investment flows will be of more interest. The April data showed that Japan investors remained net sellers of U.S. bonds (-JPY1.071 trln) after four straight months of net buying. Japan investors stayed net sellers of both Australian bonds (-JPY177 bln) and Canadian bonds (-JPY17 bln) for the fourth straight month. Investors became net sellers of Italian bonds (-JPY201 bln) after three straight months of net buying. Overall, Japan investors stayed total net sellers of foreign bonds (-JPY1.977 trln) after two straight months of net buying. Still, we believe it’s still too early to say that Japan investors have stopped chasing higher yields abroad.
Reserve Bank of Australia meets Tuesday and is expected to cut rates 25 bp to 3.60%. The bank is expected to cut rates 25 bp to 3.60%. At the last meeting May 20, the RBA cut rates 25 bp and stressed that “Inflation is in the target band [2-3%] and upside risks appear to have diminished.” Softening inflationary pressures in Australia supports the case for a follow-up RBA rate cut this week. There are no new economic projections associated with this meeting, as the next Statement on Monetary Policy will be published in August. The swaps market is pricing in nearly 100 bp of total easing over the next 12 months.
Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 3.25%. The swaps markets sees less than 15% odds of a cut. In our view, the RBNZ easing cycle is close to an end. New Zealand inflation is within the target band and the OCR is close to the RBNZ’s estimated neutral range between 2-4%. The RBNZ projects the OCR to bottom at 2.85% over Q1 2026, which nearly lines up with swaps market pricing for one more 25 bp cut. There are no new economic projections associated with this meeting, as the next Monetary Policy Statement will be published in August.
