US

USD is struggling to retrace yesterday’s slump. Bond yields are higher across the board underpinned by higher crude oil prices. US equity futures are up slightly supported by Microsoft’s solid earnings. Amazon and Apple report after today’s close.

Fed delivered a hawkish hold without claws. The Fed held rates at 3.50%-3.75% for a fifth straight meeting which was 70% priced in, and the statement was similar to the previous one. The hawkish shift was the vote. Unlike June’s unanimous decision to stand pat, the FOMC voted 9-3. Beth M. Hammack, Neel Kashkari, and Lorie K. Logan dissented in favor of a 25bps hike. The vote was more hawkish than the 10-2 split participants anticipated.

USD dropped sharply for two reasons. First, markets unwounded the residual 30% odds of a July hike. Second, Fed Chair Kevin Warsh failed to turn tough inflation rhetoric into a credible policy. Instead, he argued that “while we have not done much over the past 42 days, the markets have done quite a bit” of tightening. That amounts to outsourcing the Fed’s inflation fight to financial markets, increasing the risk that policy responds too late and falls behind the curve.

The US yield curve steepened sharply after Warsh’s remarks. Lower near-term rate expectations pulled down the front end, while higher inflation expectations lifted the long end of the curve. Warsh described the FOMC debate as “a good family fight”. He may now find himself in a more consequential battle with markets that can further raise long-term yields, weaken the dollar, and force the Fed into a more painful response.

Meanwhile, the rebound in crude oil prices is amplifying the selloff in 10-year Treasuries and global bonds. US forces retaliated against Iran, targeting military command centers, missile and drone facilities, coastal surveillance and defense sites, and maritime capabilities. We continue to see this as another round of managed escalation keeping Brent crude oil prices within a broad $70 to $100 range.

US Q2 advanced GDP and June PCE are up next (1:30pm London, 8:30am New York). Real GDP is expected at 2.0% SAAR vs. 2.1% in Q1, underpinned by consumer spending and AI-related business investment. That would keep growth around trend of 2%. Model based estimates for Q2 growth vary widely, with the Atlanta Fed GDPNow at 1.5%, the New York Fed GDP Nowcast at 2.8%, and the S&P Global PMI pointing to growth closer to 1.2%.

Headline PCE is seen at -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 (FOMC 2026 projection: 3.6%). Core PCE is expected at +0.2% m/m vs. +0.3% in May, and the annual rate is forecast to slow to 3.3% vs. 3.4% in May (FOMC 2026 projection: 3.3%).

UK

GBP/USD is holding on to most of yesterday’s rally and 10-year gilt yields remain sticky above 5.00%. Spotlight today is on the Bank of England (BOE) policy decision and Monetary Policy Report (MRP) (12:00pm London, 7:00am New York). 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, 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. With subsequent inflation data offering little fresh cause for concern, she is likely to support another hold.

The MPR will include fresh economic projections and possibly a review of the past year’s quantitative tightening (QT). BOE policymakers are expected to 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 upside is limited in part because BOE rate hike pricing is too aggressive. The swaps curve implies 62bps of tightening to 4.37% 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.

EUROZONE

EUR/USD is consolidating yesterday’s rally. Eurozone Q2 real GDP growth was double expectations at 0.4% q/q vs. 0.0% in Q1 with gains broad-based across the major economies. 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.

Bottom line: the recovery in Eurozone economic activity and above target inflation reinforces 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 implies nearly 90% odds of a 25bps rate hike at the September 10 meeting.

NEW ZEALAND

NZD is up against all major currencies and New Zealand bonds underperformed peers. The ANZ July business outlook survey was good, and indicative of an ongoing recovery in real GDP growth. Business confidence increased 19.5 points in July to a five-month high of 56.1, while Activity outlook rose 12.4 points to a five-month high of 49.3.

Above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes which is NZD supportive. The swaps curve price in 60bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% - near the top of the RBNZ estimated neutral range (2.20%-4.10%).