US
Markets are consolidating following yesterday’s action. USD rallied to a fresh three-week high, Treasuries sold-off, and US stocks retreated from record highs. The US June CPI report was the catalyst for the market moves, as it reinforced the Fed’s cautious guidance on further easing.
In our view, the USD rally is not sustainable. The Fed’s wait-and-see message is overshadowed by political pressure to lower the funds rate and risk the US economy enters a period of stagflation. Yesterday, President Donald Trump reiterated his call for a 3 points Fed rate cut, citing in all-caps “very low inflation.”
However, the US June CPI suggests progress towards the Fed’s 2% inflation goal is stalling. Headline matched consensus at 0.3% m/m vs. 0.1% in May to be up 2.7% y/y (consensus: 2.6%) vs. 2.4% in May. Core was 0.1pts cooler than anticipated at 0.2% m/m vs. 0.1% in May to be up 2.9% y/y (consensus: 2.9%) vs. 2.8% in May. Super core services (less housing) rose 0.2% m/m vs. 0.1% in May to be up 3% y/y vs. 2.9% in May.
Inflation pressures from higher tariffs remain subdued but there are emerging signs of tariff impact. Goods categories most exposed to tariffs such as household furnishings & supplies (3.4% of CPI basket), and recreational commodities (1.8% of CPI basket) are showing solid price increases. Apparel prices (2.5% of CPI basket) rose 0.4% m/m in June, matching the March rise, though they’re still down over the past three months.
The inflationary effects of tariffs are likely to intensify in the coming months. The average effective US tariff rate is estimated to have increased from 2.4% in January to 20.6% as of July 14, the highest since 1910. Indeed, Dallas Fed President Lorie Logan (2026 FOMC voter) cautioned yesterday that the tariff-related effects on inflation may not be visible until the fall. Similarly, Boston Fed President Susan Collins (2025 FOMC voter) said “my expectation is that tariffs will boost inflation over the second half of this year.”
The US June PPI is up next (1:30pm London, 8:30am New York). Headline is expected at 2.5% y/y vs. 2.6% in May while core PPI is projected at 2.7% y/y vs. 3.0% in May. Watch out for PPI services less trade, transportation, and warehousing as it feeds into the PCE. In May, this measure fell to 3.3% y/y, the lowest since January 2023.
The Fed releases its Beige Book later today (7:00pm London, 2:00pm New York). The Beige Book will offer more insights on how higher tariffs is affecting growth and prices. The last Beige Book, published June 4, pointed out that “The outlook, on balance, remains slightly pessimistic and uncertain” while “All District reports indicated that higher tariff rates were putting upward pressure on costs and prices.”
New York Fed President John Williams gives keynote remarks on the economic outlook and monetary policy (11:30pm London, 6:30pm New York). Other Fed speakers today include: Barkin (non-voter), Hammack (2026 voter), Barr, and Bostic (non-voter).
UK
GBP had a kneejerk uptick after the hot UK June CPI print reduced the likelihood of a more dovish BOE policy stance. Headline rose to 3.6% y/y (consensus & BOE projection: 3.4%) vs. 3.4% in May, the highest since January 2024. The largest upward contribution came from transport. Core CPI increased to a two-month high at 3.7% y/y (consensus: 3.5%) vs. 3.5% in May while the policy-relevant services CPI printed for a second straight month at 4.7% y/y (consensus: 4.5%, BOE projection: 4.6%).
In our view, the combination of high UK underlying inflation and a sluggish growth outlook spell trouble for GBP. We prefer to be short GBP versus EUR rather than USD in part because the ECB is nearly done easing.
CANADA
USD/CAD is trading around the middle of multi-week 1.3550-1.3800 range. Canada June CPI was largely in line with consensus and argues against additional Bank of Canada rate cuts. Headline CPI printed 1.9% y/y vs. 1.7% in May while core CPI (average of trim and median CPI) remained sticky at 3% y/y for a third consecutive month.
Bottom line: the BOC is near the end of its easing cycle, which is supportive of CAD. The swaps curve adjusted higher to imply less than 10% odds of a 25bps cut at the next July 30 meeting and 60% odds (vs. fully priced ahead of the CPI data) of a final 25bps cut in the next 12 months.
INDONESIA
USD/IDR is stable just above support at 16200. Bank Indonesia (BI) unexpectedly cut the policy rate 25bps to 5.25% and signals more easing in the pipeline. The market was split ahead of the decision with a little more than half the analysts polled by Bloomberg looking for no policy change. Looking ahead Governor Warjiyo reiterated “BI will continue to monitor the scope for reducing the BI-Rate to support economic growth, while maintaining rupiah stability and the inflation target in line with the dynamics of the global and domestic economy.”
BI anticipates the lower policy rate to help offset the drag to growth from higher US tariffs. Under the US-Indonesia trade deal announced yesterday, Indonesian goods will face a 19% tariff, up from 10% but down from a threatened 32%, while US goods will be exempt from levies.
