Two Weeks to Midnight

US

President Donald Trump gives negotiation a chance. “Based on the fact that there’s a substantial chance of negotiations that may or may not take place with Iran in the near future, I will make my decision whether or not to go [with US military involvement in the Israel-Iran conflict] within the next two weeks [around July 3].” In the meantime, foreign ministers from Britain, Germany and France will hold talks today with Iranian representatives in Geneva.

Markets breathed a sigh of relief. USD is down against most major currencies. Brent crude oil prices pulled back after rising to a five-month high at $79/bbl yesterday. Global stock markets are staging a recovery and bonds are modestly higher.

In the near-term, USD will struggle to make new cyclical lows as the Fed is in no hurry to resume easing. However, the USD downtrend is intact in part because there’s plenty more room for foreign investors to reduce their still-sizable exposure to US securities. Effort to narrow the US trade deficit mean fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities.

The US April TIC flows confirmed dwindling appetite for US securities. Net foreign purchases of long-term US securities fell by -$50.6bn in April, the most in five years. The drop was driven by private foreign investors net selling of US Treasury bonds & notes (-$46.8bn vs. 82.3bn in March) and net selling of US equities by foreign official institutions (-$33.2bn vs. -0.1 in March). On a 12-month cumulative basis, foreign investors trimmed their holdings of long-term US securities to a six-month low of $1160bn in April vs. $1283bn in March.

Second-tier US economic data are due today: the June Philadelphia Fed Business outlook index (1:30pm London) and May Conference Board leading economic indicator (3:00pm London).

UK

GBP/USD pared back some of its overnight gains. UK retail sales plunged in May, supporting the case for a Bank of England (BOE) rate cut at the next August 7 meeting. Total retail sales volumes fell by -2.7% m/m (the most since December 2023) (consensus: -0.5%) vs. 1.3% in March. Excluding auto fuel, retail sales volumes dropped -2.8% m/m (the most since December 2023) (consensus: -0.7%) vs. 1.4% in April. Sales volumes fell across all sectors, the largest fall being within food stores.

The BOE kept the policy rate unchanged at 4.25% yesterday, as was widely expected. Moreover, the BOE reiterated its guidance for “a gradual and careful approach” to further rate cuts. However, the MPC vote split was a tad more dovish than anticipated. The MPC voted by a majority of 6-3 to keep rates on hold. Taylor, Dhingra, and Ramsden preferred to reduce Bank Rate by 25bps. Consensus was looking for a 7-2 vote split to keep rates on hold.

The BOE statement also struck a cautious tone. The BOE noted that “Underlying UK GDP growth appears to have remained weak, and the labour market has continued to loosen, leading to clearer signs that a margin of slack has opened up over time.” We expect the BOE to cut rates at its next August 7 meeting. The swaps market implies 80% odds of an August cut and a total of nearly 75bps of easing over the next 12 months.

JAPAN

USD/JPY is trading in a tight range just above support at 145.00. Japan May CPI inflation ran a little hot. Core ex. fresh food was 0.1pts higher than expected at 3.7% y/y vs. 3.5% in April, the highest since January 2023. Core ex. fresh food & energy was also 0.1pts higher than expected at 3.3% y/y vs. 3.0% in April, the highest since January 2024. Headline matched consensus at 3.5% y/y vs. 3.6% in April.

Nonetheless, the BOJ will not be rushing to resume raising rates because the key gauge of underlying inflation remains below 2%. CPI ex. food and energy printed at 1.6% y/y for a third consecutive month. The swaps market still implies only 50bps of BOJ rate hikes over the next two years and the policy rate to peak at 1.00%. The BOJ’s cautious normalization cycle is an ongoing headwind for JPY. The BOJ minutes of the April-May meeting offered limited fresh insights, reflecting views formed ahead of this week’s policy decision.

CANADA

USD/CAD eased slightly after brushing a two-week high yesterday near 1.3750. The Canadian government announced a series of measures yesterday to protect Canadian steel and aluminum producers and workers. One of the measures include doubling the tariffs on US steel and aluminum to 50% on July 21 if no trade deal is reached by then. Canada is by far the top supplier of steel and aluminum to the US. Still, Canada’s steel and aluminum sector is small and account for about 0.2% of total GDP.

Canada April retail sales print is unlikely to generate much financial market volatility (1:30pm London). Statistics Canada advance estimate indicates retail sales increased 0.4% m/m vs. 0.8% in March. Like in March, higher sales in April should be driven by an increase in motor vehicle sales in anticipation of higher import duties.