The dollar was broadly weaker against the majors last week. NOK, SEK, and CHF outperformed while AUD, NZD, and GBP underperformed. The dollar saw some safe haven gains Friday as Middle East tensions ratcheted up. Some haven bid may be seen early this week, but we would look to fade that dollar strength as the underlying downtrend remains intact. The labor market is starting to crack and we look for a dovish hold from the Fed this week. On top of that, tariff noise has picked up with no resolution in sight.

AMERICAS

Ongoing hostilities between Israel and Iran are likely to dominate markets this week. The dollar’s role as a safe haven will surely be tested, and recent price action has been inconclusive. Indeed, we favor JPY and CHF, as well as gold. EM and other risk assets are likely to get much traction in this environment of heightened risks and uncertainty. However, if the Fed delivers a dovish hold as we expect (see below), the dollar is likely to resume weakening due to the worsening fundamental backdrop in the US. Similarly, equities are under pressure as the week begins but would likely recover if the Fed signals potential easing ahead.

A sustained rise in oil prices will add to the existing stagflation risks. With Israel targeting Iran’s oil and natural gas facilities, there is scope for higher prices. Brent oil is trading at the highest since January and is on track to test that month’s high near $82.65. After that is the July 2024 high near $87.95. Lower oil prices were a major reason for the lower inflation readings in H1, but it won’t take long for higher oil prices to start feeding into higher inflation readings in H2. Along with the likely hit to growth, the added stagflation risks (on top of the tariffs) will only complicate matters for the Fed.

The G7 summit will be held in Canada from Sunday to Tuesday. Trade discussions will be high on the agenda just weeks before the US 90-day tariff pause ends on July 9. President Trump said he expects some trade deals to be made at the summit. While some minor deals or frameworks may be announced, we believe China, EU and Japan are far from any deal with the US. Furthermore, we expect Middle East tensions will take up much of the bandwidth, as well as the ongoing Ukraine-Russia conflict. Lastly, we do not expect anything specific about FX except the usual boilerplate language.

The two-day FOMC meeting ends Wednesday with an expected hold. Given recent inflation data showing little tariff pass-through so far as well as signs of weakening in the labor market, we look for a dovish hold as the Fed prepares the markets for a possible cut in Q3. We expect the statement to soften its previous assessment “that the risks of higher unemployment and higher inflation have risen.” The market sees only 20% odds of July cut, rising to 80% in September and fully priced in for October.

Chair Powell’s press conference will be key. Powell will likely stick to his familiar script that “we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” However, we think it is likely that he will drop some hints that the Fed is feeling more confident that it can cut rates sooner rather than later. Of course, this current spike in oil prices could throw a spanner in the works.

Updated Dot Plots and macro forecasts will also be important. We expect the FOMC median Dots to remain unchanged and show two 25 bp cuts in 2025, which is in line with the pricing from Fed funds futures. However, we see some risks of a hawkish shift in the Dot Plots, as it would take only two officials to move from two cuts to one to get a similar move in the 2025 Dot. Paradoxically, 2025 inflation forecasts could be cut modestly, in line with recent favorable readings. Headline PCE is tracking 0.6 ppt below its 2025 projection of 2.7% while core PCE is tracking 0.3 ppt below its 2025 projection of 2.8%. Of note, the unemployment rate is tracking 0.2 ppt below the 2025 projection of 4.4%.

Data highlight will be May retail sales Tuesday. Consensus sees headline at -0.6% m/m vs. 0.1% in April, while ex-autos is seen at 0.2% m/m vs. 0.1% in April. The so-called control group used for GDP calculations, is expected at 0.3% m/m vs. -0.2% in April. Resilient labor market conditions continue to support retail sales activity, at least for now.

President Trump has reportedly instructed ICE to pause their raids on agriculture, hotels, and restaurants. Senior ICE official specified that investigations involving “human trafficking, money laundering, drug smuggling into these industries are OK.” But he also wrote that ICE agents were not to make arrests of “noncriminal collaterals.” This is the clearest acknowledgment yet that the deportation program is having a much wider impact on the economy and supports our view that the labor market is starting to crack.

Weekly jobless claims Wednesday will be of great interest. That’s because initial claims are for the BLS survey week containing the 12th of the month, and are expected at 245k vs. 248k last week, the highest since October 2024. The 4-week moving average of 240k last week was the highest since late August 2023. Continuing claims are reported with a 1-week lag and so next week’s reading will be for the BLS survey week. This week, they are expected at 1.925 mln vs. 1.956 mln last week, the highest since mid-November 2021. There is no Bloomberg consensus yet but its whisper number stands at 112k vs. 139k actual in May. As things stand, we could get a sub-100k NFP, which would be the worst monthly reading since October's 44k.

The growth outlook remains relatively strong. The Atlanta Fed GDPNow model estimates Q2 growth at 3.8% SAAR and will be updated Tuesday. Elsewhere, the New York Fed Nowcast model estimates Q2 growth at 2.3% SAAR and Q3 growth at 2.5% SAAR and will be updated Friday.

April TIC data Wednesday will also be closely watched. The March data showed foreigner investors continued to pile into US securities. However, that was the last month before reciprocal tariffs were announced. The April data are expected to highlight dwindling appetite for US securities given the unusual synchronized decline in the dollar, US stocks and Treasuries that was seen that month.

Canada highlight will be April retail sales data Friday. Statistics Canada advance estimate indicates retail sales increased 0.5% m/m vs. 0.8% in March. As in March, higher sales in April will likely be driven by an increase in motor vehicle sales in anticipation of higher import duties, as sales ex-autos are expected at -0.2% m/m vs. -0.7% in March. The swaps market sees 30% odds of a 25 bp cut in July, which becomes fully priced in by Q4. No more cuts are priced in after that and so the policy rate is seen bottoming at 2.50%.

EUROPE/MIDDLE EAST/AFRICA

Bank of England meets Thursday and is expected to keep rates steady at 4.25%. Inflation overshot expectations in April and argues for a pause. Indeed, the swaps market sees only 5% odds of a cut. That said, a dovish surprise cannot be ruled out. UK private sector regular pay growth slowed more than anticipated in April and points to easing services inflation. Moreover, real GDP shrank more than expected in April, driven by a sharp drop in the critical services sector. Updated macro forecasts will come at the August 7 meeting. Looking ahead, the swaps market sees 75 bp of total easing over the next 12 months.

Attention will be on the MPC vote split. At the last meeting May 8, the MPC voted by a 5-4 majority to trim the policy rate by 25 bp to 4.25%. Two members preferred to cut rates 50 bp (Taylor and Dhingra) and two members preferred to keep rates unchanged (Mann and Pill). Taylor and Dhingra should back a 25 bp cut in June while Mann and Pill will likely vote again to stand pat. This leaves three swing voters to decide the policy outcome. Interestingly, Governor Bailey said after the May 8 meeting “every meeting is live for us” adding that he's “very open minded” about a June rate cut.

U.K. data highlight will be May CPI Wednesday. Headline CPI is expected at 3.3% y/y after rising to 3.5% in April due to higher energy and water bills. Core is expected to fall three ticks to 3.5% y/y, while services CPI is expected at 4.8% y/y after rising to 5.4% in April due to an increase in vehicle excise duty, airfares, and sewerage collection. For reference, the BOE projects headline CPI at 3.4% y/y and services CPI at 4.7% y/y in May.

May retail sales data Friday will also be important. Retail sales including auto fuel are expected at -0.5% m/m vs. 1.2% in April, while sales excluding auto fuel are expected at -0.7% m/m vs. 1.3%. The Bank of England expects modest consumption growth of 0.2% q/q in Q2, supported by positive real wage growth. However, higher household savings means spending activity will likely remain subdued. Aggregate household saving ratio rose to 11.6% in 2024 Q4, the highest level since the pandemic.

Eurozone highlight will be Q1 labor costs Monday. The ECB projects labor costs growth will slow to 3.1% y/y in Q1 vs. 3.7% in Q4 and drift down to its historical average of 2.0% by 2027. Last week’s ECB wage tracker points to subdued wage growth ahead. The ECB is almost done easing, but low wage pressures will allow to continue cutting if needed. The swaps market implies just one 25 bp rate cut over the next 12 months that would see the policy rate bottom at 1.75%.

There will be plenty of ECB speakers this week. Nagel (twice) and Cipollone speak Monday. Villeroy and Centeno speak Tuesday. Elderson, Escriva, Villeroy, Knot, Panetta, Nagel, Centeno, and Lane all speak Wednesday. Lagarde, Villeroy, Nagel and Guindos speak Thursday.

June German ZEW investor economic sentiment survey Tuesday. The ZEW expectations index is expected at 35.0 vs. 25.2 in May, while the current situation is expected at -74.5 vs. -82.0 in May. Sentiment readings in Germany have been improving steadily, but the drop in the composite PMI to 48.5 in May warns of growing downside risks. June PMI readings for the eurozone will be reported next Monday and will be closely watched.

Riksbank meets Wednesday and is expected to cut rates 25 bp to 2.0%. A handful of analysts polled by Bloomberg see no cut, while the swaps market is pricing in 80% odds of a cut. At the last meeting May 8, the bank kept rates steady at 2.25% but warned that additional easing may be in the pipeline because “it is somewhat more probable that inflation will be lower than that it will be higher than in the March forecast.” Indeed, CPIF ex-energy fell two ticks more than the Riksbank projected in May to 2.5% y/y vs. 3.1% in April. The June Monetary Policy Report will offer a fresh batch of macro forecasts. Looking ahead, the swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%.

Norges Bank meets Thursday and is expected to keep rates steady at 4.5%. The swaps market sees just 10% odds of a cut. At the last meeting May 8, the bank kept the policy rate steady at 4.50% and stressed that “the Committee’s current assessment of the outlook implies that the policy rate will most likely be reduced in the course of 2025.” In March, the Norges Bank’s forecasts saw one 25 bp cut to 4.25% by year-end and the policy rate to bottom at 3.00% by end-2028. The June Monetary Policy Report will offer a fresh batch of macroeconomic forecasts. The Norges Bank can afford to be patient before starting to cut rates. Inflation is persistently above the 2% target and the Norges Bank’s Regional Network contacts expect growth to remain firm in Q2 and Q3. The swaps market is pricing in 75 bp of total easing over the next two years that would see the policy rate bottom at 3.75%.

Swiss National Bank meets Thursday and is expected to cut rates 25 bp to 0%. The swaps market is pricing in nearly 25% odds of a larger 50 bp cut to -0.25%. We doubt the SNB will deliver a jumbo 50 bp cut. Headline CPI printed at -0.1% y/y in May and is tracking below the SNB’s projection of 0.3% over Q2. However, SNB President Schlegel cautioned last month that “the SNB does not necessarily have to react” to negative inflation figure. Meanwhile, SNB board member Tschudin cautioned that the negative monthly CPI “is just one data point” and that the bank focuses on the medium term. That said, the swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottoming at -0.25%.

ASIA

Two-day Bank of Japan meeting ends Tuesday with an expected hold. The bank is widely expected to retain its commitment to raising rates if the outlook for economic activity and prices will be realized. There are no updated macro forecasts at this meeting, as the next BOJ Outlook Report is due at the next meeting July 30-31. The focus instead will be on the BOJ’s interim assessment of its JGB purchases tapering plan. The BOJ is currently trimming its JGB purchases by about JPY400 bln per quarter through March 2026. Given heightened volatility across all financial markets, we expect the bank to maintain the current pace of reduction in JGB purchases whilst reiterating that it stands ready to make one-off purchases as needed to smooth market functioning.

The account of the May meetings between the BOJ and bond market participants showed mixed views about the pace of tapering. Some argued the BOJ should accelerate the pace of the reduction to increase the amount of JGBs in the secondary market. Others argued for the BOJ to decrease the pace of reduction given the difficulty of identifying the optimal level of the Bank's JGB holdings. Finally, another group favored keeping the current pace of JGB reduction intact. Governor Ueda speaks Friday.

Japan data highlight will be May national CPI Friday. Headline is expected to fall a tick to 3.5% y/y, core (ex-fresh food) is expected to pick up a tick to 3.6%, and core ex energy is expected to pick up two ticks to 3.2% y/y. Reports emerged last week that the BOJ sees inflation higher than what was expected earlier in the year. Updated macro forecasts won’t be released until the July 30-31 but it seems pretty clear that the May inflation forecasts are too low given the recent price trends.

May trade data Wednesday will also be closely watched. Exports are expected at -3.7% y/y vs. 2.0% in April, while imports are expected at -5.8% y/y vs. -2.2% in April. Comments from Japan officials suggest a trade deal with the US remains elusive. With July Upper House elections looming, we believe Prime Minister Ishiba will be hard-pressed to open up the domestic agricultural and auto markets for fear of losing support for his LDP candidates.

Australia highlight will be May jobs data Thursday. Consensus sees 20k jobs added vs. 89k in April, while the unemployment is seen steady at 4.1% on an unchanged participation rate of 67.1%. The RBA projects the unemployment rate to rise to 4.2% in June and stabilize at 4.3% thereafter. However, leading indicators point to less favorable job market conditions. The NAB Employment subindex plunged to 0.4 (the lowest since January 2022) vs. 3.6 in April. Moreover, the Westpac-Melbourne Institute Unemployment Expectations subindex rose 5% to 127.4 in June, implying consumers expect unemployment to rise over the year ahead. Overall, the RBA has room to deliver more rate cuts. The market sees nearly 85% odds of a 25 bp cut to 3.60% at the July 8 meeting and is pricing in nearly 100 bp of total easing over the next 12 months.

New Zealand highlight will be Q1 GDP data Thursday. Real GDP growth is expected at 0.7% q/q vs. 0.7% in Q4, while the y/y rate is expected at -0.8% vs. -1.1% in Q4. The RBNZ’s new GDP nowcasting model, Kiwi GDP, suggests the economy grew 0.6% in Q1. The RBNZ signaled at its last May 28 meeting that the easing cycle is on pause for the time being. Governor Hawkesby stressed that “when we next meet in July a further cut in the OCR is not a done deal. We’re really more in a phase where we are taking considered steps, data dependent.” The swaps market sees 20% odds of a rate cut at the next meeting July 9 and only 25 bp of total easing over the next 12 months that would see the policy rate bottom at 3.00%.