The dollar was broadly weaker last week after soft U.S. data. GBP, EUR, and AUD outperformed while JPY, CAD, and CHF underperformed. Inflation data this week will be key for cementing the more dovish Fed narrative. As always, it’s the relative story that counts in FX and we see rising risks in the rest of the world that should help the dollar, including political uncertainty in France.

AMERICAS

Fed Chair Powell delivers his Semiannual Monetary Policy Report to Congress this week. He appears before the Senate Banking Committee Tuesday and then before the House Financial Services Committee Wednesday. Powell is expected to continue urging patience before the eases. He noted last week that the latest data “do suggest that we’re getting back on a disinflationary path” and stressed that “the strong economy and job market give us the ability to take time” before starting to cut rates.

We do not think the soft June ISM and jobs data reported last will materially change the Fed's thinking near-term. The U.S. economy, whilst slowing, is still doing whether well and so the Fed will be cautious and remain on hold at the July 30-31 FOMC meeting. The market is pricing in less than 10% odds of a cut then and around 80% in September, virtually unchanged from pre-NFP. Barr and Bowman speak Tuesday. Goolsbee, Bowman, and Cook speak Wednesday. Bostic and Musalem speak Thursday.

The economy is still holding up relatively well. New York Fed's Nowcast model is tracking Q2 growth at 1.8% SAAR vs. 1.9% previously and Q3 growth at 2.1% SAAR vs. 2.2% previously. This is higher than the Atlanta Fed's GDPNow model, which is tracking Q2 growth at 1.5% SAAR and will be updated Wednesday after the data. Bottom line: the labor market is softening but the overall economy is still growing near trend. That should give the Fed confidence to stay on hold in July, but with an eye towards cutting rates in September.

June inflation data take center stage. CPI will be reported Thursday. Headline is expected to fall two ticks to 3.1% y/y while core is expected to remain steady at 3.4% y/y. Keep an eye on super core, which slowed a tick to 4.8% y/y in May. Of note, the Cleveland Fed’s Nowcast model is tracking headline at 3.1% and core at 3.5%. Looking ahead, the model is tracking July headline at 3.2% and core at 3.6%. PPI will be reported Friday. Headline is expected to fall two ticks to 3.1% y/y while core is expected to remain steady at 3.4% y/y. Watch out for PPI ex-trade, transportation, and warehousing as it feeds into the core PCE calculations. This measure rose 4.5% y/y in May and another sticky print above 4% y/y is an upside risk to inflation.

Even another month of improved inflation data won’t get the Fed to cut this month. After the July 30-31 meeting, the Fed will see July and August readings for jobs, CPI, PPI, and retail sales and the July PCE reading ahead of the September 17-18 FOMC meeting. By that point, the Fed should have a much better idea of where the economy is going and will feel more comfortable making a policy pivot.

New York Fed June inflation expectations will be reported Monday. Expectations remain elevated, both here and in other consumer sentiment surveys. This is another reason for the Fed to stay patient.

University of Michigan preliminary July consumer sentiment will be reported Friday. Headline is expected at 67.0 vs. 68.2 in June. This would be consistent with softer household spending activity. 1-year inflation expectations are seen steady at 3.0%, which should keep the Fed cautious.

EUROPE/MIDDLE EAST/AFRICA

The leftist parties appear headed to a surprise victory in second and final round of the French legislative elections Sunday. As of this writing, exit polls suggest the leftist New Popular Front will get 172-210 seats, President Emmanuel Macron’s centrist Ensemble group will get 150-175, and Le Pen’s far-right National Rally will get 113-155. The New Popular Front would fall short of an absolute majority but as the largest coalition in the 577 -seat National Assembly, it would have a huge influence on the legislative agenda. A hung parliament will generate more political instability and lead to policy gridlock, and so the euro and French bonds are likely to come under renewed downside pressure.

ECB hawks remain in control of the narrative. Over the weekend, Nagel said wage gains and services inflation remain elevated, adding “For that reason, we can’t rush with lowering interest rates.” Cipollone speaks Tuesday. Nagel speaks Wednesday. No change is expected at the July 18 meeting, but the market is pricing in nearly 80% odds of a cut September 12.

Eurozone data reports are limited this week. Germany reports May trade data Monday. Exports are expected at -2.5% m/m vs. 1.6% in April, while imports are expected at -0.8% m/m vs. 1.9% in April. Italy reports May IP Wednesday.

The monthly U.K. data dump begins. May GDP, IP, services, and construction output will be reported Thursday. GDP is expected at 0.2% m/m vs. flat in April, IP is expected at 0.2% m/m vs. -0.9% in April, services is expected to remain steady at 0.2% m/m, and construction is expected at 0.5% m/m vs. -1.4% in April. Risks are skewed to the upside because of the solid pick up in retail sales volumes in May.

Bank of England is likely to cut sooner rather than later. The market sees nearly 70% odds of a cut August 1, but we believe it is a done deal, as there is simply no reason to wait until September 19 when inflation is already at the 2% target. Haskel speaks Monday. Pill and Mann speak Wednesday.

Norway reports June CPI Wednesday. Headline is expected to fall a tick to 2.9% y/y, while underlying is expected to fall half a point to 3.6% y/y. If so, inflation would come in below the Norges Bank’s forecasts for Q2. However, the Norges Bank is in no rush to start easing. At the June meeting, the Norges Bank pushed out the timing of a first rate cut to Q1 2025 from Q3 2024 previously and penciled in just one 25 bp cut over the next twelve months. The market sees two cuts over the same period.

Sweden reports June CPI Friday. Headline is expected to drop nearly a full percentage point to 2.8% y/y, CPIF is expected at 1.6% y/y vs. 2.3% in May, and CPIF ex-energy is expected to drop half a point to 2.5% y/y. The Riksbank forecasts CPIF and core CPIF inflation to fall in June to 1.5% y/y and 2.5%, respectively. Given the disinflation already in place, the Riksbank shifted its forward guidance to “the policy rate can be cut two or three times during the second half of the year.” A 25 bp cut in August is more than fully priced in by the market.

ASIA

Japan highlight will be May cash earnings data Monday. Nominal cash earnings are expected at 2.1% y/y vs. a downwardly revised 1.6% y/y in April, while real earnings are expected to remain steady at -1.2% y/y. The less volatile scheduled pay growth for full-time workers, which has been sticky around 2% since September 2023, is expected to a rise a tick to 2.2% y/y in May. The market is pricing in around 50% odds of a 10 bp rate hike at the next meeting July 31, and a total of 35 bp of tightening over the next 12 months. Given recent softness in the economy, that’s about right in our view.

May current account data will also be reported Monday. The adjusted surplus is expected at JPY2.139 trln vs. JPY2.524 trln in April. However, the investment flows will be of more interest. The April data showed that Japan investors were net sellers of U.S. bonds (-JPY188.5 bln) for the first time since November. Japan investors stayed net sellers (-JPY259.5 bln) of Australian bonds for the fourth straight month and stayed net buyers of Canadian bonds (JPY15.5 mln) for the second straight month after eight straight months of net selling. Investors turned buyers of Italian bonds (JPY2 bln) after three straight months of selling. Overall, Japan investors turned total net sellers of foreign bonds (-JPY1.07 trln) for the first time after seven straight months of net buying. With Japan yields likely to move higher in H2, it’s possible that Japan investors will keep chasing higher yields abroad, but we think it’s still too early to say.

Orders data will be important. June machine tool orders will be reported Tuesday. May core machine orders will be reported Thursday and are expected at 7.1% y/y vs. 0.7% in April.

Reserve Bank of New Zealand meets Wednesday and is expected to keep rates steady at 5.5%. The bank is widely expected to leave the Official Cash Rate (OCR) at 5.50% and reiterate its hawkish bias. Specifically, the RBNZ Summary Record should highlight again that “the Committee discussed the possibility of increasing the OCR at this meeting.” There is no press conference nor updated macro projections. The RBNZ’s May rate path projection implies a 60% probability of a rate hike by year-end and the first OCR cut in Q3 2025. Our base case is for the RBNZ to start easing as soon as November, as New Zealand’s sluggish growth outlook will accelerate the disinflationary process. The market has more than fully priced in a November rate cut, with 60% odds of an earlier cut in October.