US
USD extended yesterday’s broad rally despite a dovish repricing in US rate expectations following the soft inflation data. Crude oil prices are little changed, suggesting geopolitics are not driving the move. The USD bounce therefore looks more technical than fundamental and is unlikely to have much staying power.
Fed funds futures trimmed bets of a September rate hike to 35% from roughly 50% after the US July CPI print signaled inflation is cooling. In line with consensus, headline CPI rose +0.1% m/m vs. -0.4% in June and eased to 3.4% y/y vs. 3.5% in June. Core CPI rose +0.2% m/m vs. 0.0% in June and ease to 2.5% y/y vs. 2.6% in June. Super core CPI (services less housing) fell to a five-month low at 2.8% y/y vs. 3.2% in June.
Importantly, inflation momentum eased in July. The three-month annualized rate of core CPI, headline, and super core all plunged under the Fed’s 2% target.
Nevertheless, measures of underlying inflation suggest progress towards the Fed’s 2% target is stalling.
• The Atlanta Fed's sticky-CPI (weighted basket of items that change price relatively slowly) printed at 2.8% y/y for a second straight month.
• The Cleveland Fed 16% trimmed-mean CPI (strips out the most extreme 8% price increases and decreases) printed at 2.6% y/y for a second straight month.
• The Cleveland Fed median CPI printed at 2.7% y/y for a second straight month.
In our view, there is room for a further dovish repricing in Fed hike expectations against USD. The US labor market is in balance, wage growth is consistent with the Fed’s 2% inflation target, and Fed policy is restrictive. Today, the US July PPI print (1:30pm London, 8:30am New York) will help firm up estimates for the policy-relevant July PCE data due on August 26.
NORWAY
NOK weakened after the Norges Bank delivered a less hawkish hold. As was widely expected, the Norges Bank left the policy rate at 4.25% for a second straight meeting.
Norges Bank softened its hawkish bias. It shifted from signaling that another rate hike was “likely” at “at one of the forthcoming monetary policy meetings” to simply noting “It may still become necessary to raise the policy rate.” The Norges Bank also dropped its explicit call for a tighter stance, reiterating only that “a restrictive monetary policy stance is still needed.”
Further downside surprise in Norway’s inflation backdrop relative to the Bank’s projection will weaken the case for an additional rate hike. Still, Norway’s attractive carry remains supportive of NOK.
JAPAN
USD/JPY is holding just under psychological resistance at 160.00. News that Japan’s government supports faster BOJ rate hikes reinforces the narrowing in US-Japan rate differentials and the case for a lower USD/JPY. The Prime Minister’s office noted “we believe specific monetary policy measures, including interest rate hikes, should be left to the Bank of Japan.”
Regardless, the narrative the BOJ needs to tighten more aggressively to strengthen JPY is misleading. US-Japan 2-year rate differentials narrowed sharply in 2025 as the BOJ raised rates, yet USD/JPY moved higher. That divergence is largely explained by a material rise in Japan’s fiscal risk premium.
Market concerns over Japan fiscal profligacy have since stabilized, reflected by the consolidation in the 10-year JGB term premium. Together with the threat of further joint US-Japan FX intervention, and a less troubling energy outlook, should help realign USD/JPY with rate differentials.
UK
GBP/USD is directionless around 1.3500. UK economic activity was encouraging over Q2 and in June. Real GDP rose 0.4% q/q vs. 0.6% in Q1, in line with consensus and marginally above than the Bank of England’s (BOE) 0.3% q/q forecast.
The details point to respectable domestic demand activity as Q2 growth was mainly driven by gross fixed capital formation (+0.24ppt) and household consumption (+0.16ppt). Government spending was the biggest drag to growth in Q2 (-0.06ppt) reflecting declines in health and education.
In parallel, monthly real GDP beat expectations. Real GDP unexpectedly increased 0.3% m/m in June (consensus: -0.1%) vs. 0.0% in May entirely driven by a 0.4% m/m rise in services output. Production output fell -0.2% m/m while construction output declined -0.1% m/m.
Bottom line: the UK GDP prints are unlikely to shift the dial on BOE rate expectations. The UK inflation backdrop is a bigger concern for the BOE with the July CPI report due next week. For now, the swaps curve continues to imply 50bps of BOE tightening to 4.25% in the next twelve months.
NEW ZEALAND
NZD/USD dropped briefly under its 200-day moving average (0.5832). The RBNZ Q3 inflation expectations survey was mixed but still well anchored. Expectations for one-year-ahead annual CPI inflation decreased -81bps to 2.60%, two-year ahead decreased -19bps to 2.34%, five-year-ahead increased +9bps to 2.31%, and ten-year ahead increased +1bps to 2.20%.
Overall, inflation expectations remain close to the RBNZ 2% target midpoint for inflation, underscoring the bank’s credibility. Nonetheless, above target inflation, more favorable domestic growth outlook, and a policy rate near the lower-end of the RBNZ’s neutral range (2.20%-4.10%) argue for additional RBNZ rate hikes. The swaps curve more than fully price in 75bps of tightening over the next twelve months to 3.25% which bodes well for NZD.
