12/07/2025 Week Ahead

U.S. Inflation & Trade Policy Take Focus

Key Takeaways:

  • The US dollar strengthened against most G10 currencies last week, with the Australian dollar as a key exception.
  • The Dollar Index has risen steadily since July 2, supported by higher US yields and strong Fed commitment.
  • Sterling, yen and Canadian dollar saw extended declines, suggesting the dollar rally may be nearing exhaustion.
  • This week’s US inflation and trade policy announcements could determine the dollar's next direction.
  • UK and eurozone data, along with China’s Q2 GDP, are also likely to influence broader market sentiment.

The US dollar gained ground against nearly all G10 currencies last week, extending its recent rebound. The exception was the Australian dollar, which found support after the central bank surprised markets by leaving interest rates unchanged. Broadly, the dollar’s strength appears to be a technical correction from its late June decline, aided by rising US yields and consistent policy signals from the Federal Reserve. The Dollar Index climbed every day last week and has not posted a single daily decline since July 2. US 10-year yields have slipped only once this month, and the 2-year yield has retreated on just two occasions.

Several currency pairs have now reached or exceeded short-term technical targets. Sterling, for instance, has dropped for six straight sessions, while the yen and Canadian dollar have also come under sustained pressure. While a deeper correction in the dollar is possible, markets are likely to take clearer direction from this week’s data. US CPI is due Tuesday and is expected to show renewed price acceleration. Producer prices and the Fed’s Beige Book follow on Wednesday, with import prices on Thursday. By then, the US is also expected to announce new bilateral tariff measures, potentially impacting trade relations, particularly with the EU.

In the UK, following two consecutive months of GDP contraction, inflation is likely to remain sticky and payroll figures may extend their downward trend. The combination points to increasing fiscal strain for the new government. Meanwhile, eurozone industrial production is expected to improve, which may reduce expectations of further ECB rate cuts. The euro closed the week at its lowest since early April. Separately, China will become the first major economy to release Q2 GDP figures, with markets anticipating confirmation of a slowdown in domestic activity.

United States of America

Overview

The US dollar continues to attract broad support as markets reassess its relationship with interest rates. Despite widespread discussion that the dollar may have decoupled from rate dynamics, the recent recovery aligns closely with a rise in Treasury yields. The 2-year and 10-year yields have climbed by roughly 17 basis points so far in July, while the implied year-end Fed funds rate has also increased. This reflects a growing perception that the Federal Reserve is unlikely to resume easing unless forced by trade policy developments. Fed Chair Powell has openly stated that additional tariffs are the primary obstacle to further rate cuts.

President Trump's latest remarks suggest a shift toward more aggressive trade measures. Instead of a flat 10% tariff on all imports, the administration may consider 15% to 20% levies, particularly targeting bilateral trade partners. These developments come at a time when the domestic economy is sending mixed signals. Industrial production has contracted in four of the first six months of 2025, with the latest figures showing back-to-back monthly declines for the first time this year. However, retail sales may have stabilized in June, and inflation data is expected to confirm persistent consumer price pressures.

Headline and core CPI are both forecasted to rise by 0.3% in June, pushing the year-over-year rates to 2.7% and 3.0%, respectively. Import prices, especially excluding oil, accelerated in the second quarter, suggesting that some of the tariff burden is being absorbed by businesses rather than passed on to consumers. Notably, foreign investment into US equities and bonds remains robust, with 2025 inflows through April exceeding the same period last year.

Economic Drivers

  • Market expectations have reconnected the dollar with US interest rates, supported by higher Treasury yields.
  • Fed Chair Powell indicated further easing would have occurred if not for impending tariffs.
  • Rising trade tensions, with potential tariffs of 15% to 20%, are now a key driver of monetary policy expectations.
  • Industrial production remains weak, showing the first back-to-back monthly declines in 2025.
  • Foreign demand for US financial assets has remained strong, outpacing 2024 levels.

Data and Events

  1. 15 July 2025: CPI.
  2. 15 July 2025: Empire State Manufacturing Index.
  3. 16 July 2025: FOMC Members Speaks.
  4. 16 July 2025: PPI.
  5. 17 July 2025: Retail Sales.
  6. 17 July 2025: Unemployment Claims.
  7. 17 July 2025: Philly Fed Manufacturing Index.
  8. 18 July 2025: FOMC Members Speaks.
  9. 18 July 2025: Prelim UoM Consumer Sentiment & Inflation Expectations.

Price Action

  • The Dollar Index has completed the 50% retracement of its decline from June 23, reaching 97.90.
  • The next retracement target is near 98.25, with a corresponding technical gap from June 24 also around this level.
  • A broader correction could extend toward 98.50, matching the 38.2% retracement from the mid-May high near 102.00.
  • Resistance trendline from March to June highs starts at 98.15 on Monday and falls toward 97.80 by week’s end.

Key Points:

  • Dollar recovery is now more aligned with higher interest rates and hawkish Fed guidance.
  • Trump’s tariff escalation plans may delay any rate cuts from the Fed.
  • Inflation is expected to pick up, while industrial output remains under pressure.
  • Technical resistance for DXY lies between 98.15 and 98.50.
  • Foreign investment in US assets has been stronger in 2025 than last year.

Australia & New Zealand

Overview

The Reserve Bank of Australia (RBA) surprised markets last week by holding interest rates steady, defying expectations for a cut. This unexpected decision gave the Australian dollar a strong boost, briefly lifting it to a new year-to-date high. Despite the reaction, the correlation between the exchange rate and domestic yields remains weak. Instead, the Australian dollar appears more closely aligned with broader currency movements, particularly those of the Canadian dollar and the US Dollar Index. The inverse relationship with the Dollar Index recently reached its most extreme since April 2024, reflecting external factors as stronger influences on AUD direction.

Attention now shifts to Australia's upcoming labour market report. The economy has added an average of 18,300 jobs per month in the first five months of 2025, down from 32,100 over the same period last year. However, full-time hiring has remained relatively stable, with 20,400 full-time jobs created monthly on average, compared to 24,500 last year. Participation has continued to rise, now averaging 67.0%, up from 66.6%, yet the unemployment rate has held steady at 4.1%. Despite last week's central bank surprise, the futures market remains confident in a rate cut at the next meeting.

Economic Drivers

  • The RBA’s decision to keep rates unchanged surprised markets and temporarily strengthened the Australian dollar.
  • AUD's movements are more closely tied to the Canadian dollar and Dollar Index than to domestic yields.
  • Labour market growth has slowed, though full-time hiring remains resilient.
  • Rising participation rates are offsetting the impact of modest employment gains.
  • The unemployment rate has been stable at 4.1% throughout 2025.

Data and Events

  1. 15 July 2025: Consumer Sentiment.
  2. 16 July 2025: RBNZ Statement of Intent.
  3. 17 July 2025: Inflation Expectations.
  4. 17 July 2025: Employment Change.
  5. 17 July 2025: Unemployment Rate.

Price Action

  • The Australian dollar dipped below $0.6500 early last week before rallying sharply on the RBA announcement.
  • It reached a marginal new high for 2025 near $0.6595 heading into the weekend.
  • Both the 5-day and 20-day moving averages are now rising, supporting the bullish short-term structure.
  • If the breakout continues, the next resistance is near $0.6700.
  • Momentum indicators appear soft, suggesting caution is warranted despite recent strength.

Key Points:

  • The RBA surprised markets by holding rates steady, lifting the Australian dollar.
  • AUD correlation with the Dollar Index remains strong and inversely aligned.
  • Labour market data remains mixed, with stable full-time hiring and rising participation.
  • Technical breakout faces limited resistance until $0.6700, though momentum is weak.
  • A rate cut next month remains largely priced in by markets.

Canada

Overview

The Canadian dollar remains under pressure as global correlations and domestic inflation data take center stage. Movements in the USD-CAD exchange rate have closely mirrored shifts in the US 2-year yield over the past 30 trading days, while the currency also remains heavily influenced by the broader US Dollar Index. The correlation between USD-CAD and WTI crude oil prices has weakened recently, fluctuating between -0.40 and 0.30, and currently sits near 0.20, suggesting oil is no longer a dominant short-term driver.

Canada's upcoming inflation report is a key focus. Following a sharp 0.6% increase in May CPI, June's reading is expected to show a more moderate gain of 0.1% to 0.2%. However, due to a soft base in June 2024, the year-over-year figure is likely to rise to around 1.9% to 2.0%. Core inflation remains firm at 3.0% to 3.1%, up from 2.5% at the end of last year. Despite firm core readings, the Bank of Canada is widely expected to leave rates unchanged at its July 30 meeting unless inflation data surprises significantly to the downside.

Separately, Canada will report portfolio investment data for May. In contrast to strong foreign buying in early 2024, the first four months of 2025 have seen a net outflow of around C$15.1 billion. However, currency movements have not followed this trend directly. The Canadian dollar weakened in the first part of 2024 but appreciated during the same period in 2025, indicating that other forces, such as relative rate expectations and trade policy, are playing a larger role.

Economic Drivers

  • USD-CAD remains positively correlated with US 2-year yields and the Dollar Index.
  • WTI crude’s influence on the Canadian dollar has weakened considerably in recent months.
  • Core CPI remains elevated, suggesting persistent underlying inflation pressures.
  • Foreign portfolio investment has turned negative in 2025, contrasting with inflows in early 2024.
  • Market pricing implies no rate change from the Bank of Canada in July unless inflation data shifts unexpectedly.

Data and Events

  1. 14 July 2025: Wholesale Sales.
  2. 15 July 2025: CPI.
  3. 16 July 2025: Housing Starts.

Price Action

  • USD/CAD reached a two-week high near 1.3730, driven by renewed US tariff announcements.
  • The 61.8% retracement level of the June 23 downtrend sits slightly above 1.3700 and is under pressure.
  • A sustained break above 1.3740 would open the path toward 1.3800.
  • Despite the tariff headwinds, implied rates from the options market rose last week, reflecting rising policy uncertainty.

Key Points:

  • Canadian CPI is expected to firm slightly in June, while core inflation remains persistent.
  • Portfolio flows have turned negative in 2025, but currency performance has not followed directly.
  • USD/CAD trades near key resistance, lifted by US tariff news and strong USD momentum.
  • Oil price correlation with CAD has weakened significantly.
  • The Bank of Canada is expected to hold rates at its July meeting barring an inflation surprise.

China

Overview

The Chinese yuan continues to closely track the US dollar, a strategy that affects its exchange rate dynamics with other trading partners. In a weaker dollar environment, the yuan naturally appreciates against other major currencies, even as it declines against the greenback. This year, the yuan has weakened against the euro by about 10.8% and against the yen by 5.0%, while only the Hong Kong dollar, Indonesian rupiah and Indian rupee have underperformed it within the Asia Pacific region. The People's Bank of China (PBOC) has gradually lowered the daily reference rate for the dollar, setting it at CNY7.1475 before the weekend, its lowest level since November last year.

Economic momentum appears to be fading, with signs that both June activity and second-quarter GDP growth have moderated. China is set to release its Q2 GDP figures on July 15, becoming the first major economy to do so. Quarterly growth is expected to have slowed to around 1.0% from 1.2% in Q1, while annual growth may have eased to 5.2% from 5.4%. The ongoing weakness in the property sector continues to weigh on the broader recovery. Despite earlier guidance, the PBOC seems to have stepped back from plans to cut interest rates or lower reserve requirements, possibly due to currency stability concerns.

Economic Drivers

  • The yuan remains closely pegged to the US dollar, limiting its flexibility against non-USD currencies.
  • In a weaker dollar environment, the yuan gains ground against other major trading partners.
  • The PBOC is gradually lowering the dollar’s reference rate, reflecting a more controlled depreciation strategy.
  • Economic activity likely slowed in June and Q2, with downside risks from the property sector.
  • The central bank appears to have paused plans for further monetary easing.

Data and Events

  1. 14 July 2025: Trade Balance.
  2. 14 July 2025: New Loans.
  3. 15 July 2025: GDP.
  4. 15 July 2025: Industrial Production.
  5. 15 July 2025: Retail Sales.
  6. 15 July 2025: Unemployment Rate.

Price Action

  • The dollar peaked last week near CNH7.1880 before falling back to around CNH7.1660.
  • The decline retraced 61.8% of the move from the year’s low set on July 1 near CNH7.15.
  • Support is seen just below CNH7.1650, which could be tested if downward momentum continues.

Key Points:

  • China’s yuan remains tied to US dollar movements, limiting its autonomy against other currencies.
  • Q2 GDP is expected to show slower growth, with the economy losing momentum.
  • The property sector continues to struggle, dragging on the recovery outlook.
  • PBOC has eased the reference rate but stepped back from deeper policy cuts.
  • Key support levels are forming around CNH7.1650 as markets reassess yuan direction.

Europe

Overview

The euro has come under pressure as US yields regain traction and rate differentials widen. Over the past several sessions, the US 2-year yield premium over Germany has expanded by more than 20 basis points, coinciding with a short-term downside correction in the euro. While the move appears nearly complete, upcoming US CPI data will provide clearer direction. Despite recent losses, sentiment remains tilted toward medium-term euro strength, with many targeting the $1.20 level.

Within the eurozone, the central bank’s easing cycle appears to be on hold. The European Central Bank front-loaded its rate cuts earlier this year, and while a stronger euro may further weigh on inflation, market pricing now reflects reduced expectations for another cut in 2025. The probability of a September cut has dropped below 40%, while the chance of a further cut later this year has fallen to around 80%, the lowest in two months. Upcoming industrial production, trade and construction data from the region, along with Germany’s ZEW investor survey, are unlikely to alter the broader view that the eurozone economy has lost momentum since its 0.6% expansion in Q1.

Economic Drivers

  • US-German 2-year yield spreads have widened, pressuring the euro lower.
  • ECB rate expectations have moderated, with markets reducing the probability of further cuts.
  • The euro’s strength is dampening inflation, reinforcing the ECB’s wait-and-see approach.
  • Eurozone economic activity has stagnated following modest growth in Q1.
  • The US tariff announcement remains a potential market shock regardless of its specifics.

Data and Events

  1. 15 July 2025: ZEW Economic Sentiment.
  2. 15 July 2025: Industrial Production.
  3. 16 July 2025: Trade Balance.
  4. 16 July 2025: German 30-y Bond Auction.
  5. 17 July 2025: Final CPI.
  6. 18 July 2025: German PPI.
  7. 18 July 2025: Current Account.

Price Action

  • The euro fell through the 38.2% retracement of its rally since June 23, near $1.1685.
  • It has stalled just ahead of the 50% retracement around $1.1640.
  • The euro has hovered near its 20-day moving average at $1.1665 but has not closed below it since May 19.
  • The 5-day moving average is close to crossing below the 20-day, potentially confirming bearish momentum.
  • A clear break below $1.1600 would suggest a deeper correction, possibly extending another cent lower.

Key Points:

  • Euro correction aligns with widening US yield spreads and reduced ECB cut expectations.
  • Eurozone economic data remains soft and unlikely to shift the broader macro narrative.
  • ECB pause appears justified, with further cuts less likely in the short term.
  • Euro nearing key technical support; a break below $1.1600 could signal further downside.
  • Market focus remains on upcoming US inflation data and trade policy updates.

Japan

Overview

The yen remains closely tied to US bond market developments, with the correlation between the dollar-yen exchange rate and the US 10-year Treasury yield climbing to its highest level since February. While Japanese long-term yields also show some correlation with USD/JPY, it is still the movement in US yields that exerts the dominant influence. This reflects ongoing divergence in monetary policy outlooks between the Federal Reserve and the Bank of Japan.

On the domestic front, Japan’s inflation appears to be easing. Tokyo’s CPI figures signaled slower price growth across all key measures in June, a trend expected to be reflected in the national CPI data. Core inflation is likely to have fallen to around 3.2% to 3.3% from 3.5% previously. The swaps market has priced out nearly all near-term tightening, now reflecting only about 10 basis points of additional hikes for the rest of the year, the lowest in two months. Elsewhere, Japan's services sector is showing resilience, while trade dynamics are improving. May saw a deficit of nearly JPY640 billion, but historically, June tends to show a significant seasonal improvement in trade balance. Also of note, Japan will hold an upper house election on July 20, although any market impact is expected to be minimal barring a major political upset.

Economic Drivers

  • USD/JPY is increasingly driven by US 10-year yield movements, with correlations nearing a five-month high.
  • Japanese inflation is slowing, reducing pressure on the Bank of Japan to tighten policy.
  • Market pricing implies minimal further hikes by the BoJ in 2025.
  • Japan’s services sector is expanding, supported by stronger PMIs and tertiary activity growth.
  • Trade balance is improving seasonally, with the deficit narrowing compared to the same period last year.
  • Political risk remains low ahead of the July 20 upper house election, although internal LDP dynamics bear watching.

Data and Events

  1. 14 July 2025: Machinery Orders.
  2. 14 July 2025: Industrial Production.
  3. 17 July 2025: Trade Balance.
  4. 18 July 2025: National Core CPI.

Price Action

  • USD/JPY closed at its highest level since May 13 and is approaching resistance near JPY148.00.
  • The pair continues to trade within a two-month range between JPY142.00 and JPY148.00.
  • Momentum indicators suggest potential for a bullish breakout.
  • Rising US yields and the universal tariff policy support further dollar strength.
  • The CPI and import price trends out of the US may add to upward pressure on yields and USD/JPY.

Key Points:

  • Dollar-yen is strongly aligned with US 10-year yield movements.
  • Japanese inflation is cooling, diminishing the likelihood of near-term policy tightening.
  • Services remain a bright spot in Japan’s otherwise sluggish economic recovery.
  • USD/JPY is nearing key resistance at JPY148.00, with bullish momentum building.
  • Japan’s trade position is seasonally improving, while political developments are unlikely to move markets in the short term.

United Kingdom

Overview

Sterling has struggled to find support, even as UK government bond yields have risen. This divergence reflects a deeper disconnect between currency performance and interest rate expectations. For much of the year, changes in sterling have moved inversely to UK 10-year and 2-year Gilt yields, with correlations nearing their most negative levels in over a year. Despite some recent movement in yields, the pound continues to trade lower, with limited sensitivity to rate dynamics.

The focus now turns to two major data releases: inflation and labour market figures. Inflation is expected to rise on a year-over-year basis, partly due to base effects and a hike in utility taxes. Consumer prices increased at an annualised pace of 4.8% in the first five months of 2025, compared to 2.9% in the same period last year. Meanwhile, the labour market continues to soften, with the Bank of England attributing part of the slowdown to a rise in payroll taxes. Although wage growth is decelerating, it still exceeds CPI inflation, adding complexity to the monetary policy outlook. For the past three weeks, markets have priced in an 80% or higher probability of a rate cut at the Bank’s next meeting.

Economic Drivers

  • Sterling has shown a negative correlation with UK Gilt yields throughout most of 2025.
  • Inflationary pressures remain elevated due to tax changes and base effects.
  • The labour market is weakening, and higher payroll taxes may be contributing to the slowdown.
  • Wage growth is easing but continues to outpace inflation.
  • Market pricing strongly supports a rate cut at the next Bank of England meeting.

Data and Events

  1. 16 July 2025: BOE Gov Bailey Speaks.
  2. 16 July 2025: CPI.
  3. 17 July 2025: Average Earnings Index.
  4. 17 July 2025: Claimant Count Change.
  5. 17 July 2025: Unemployment Rate.

Price Action

  • Sterling fell below $1.3530 after weak May GDP data, marking a break of the 61.8% retracement from the June 23 low.
  • The pound has declined for six straight sessions, matching its longest losing streak in two years.
  • Immediate support lies between $1.3460 and $1.3470, with a break potentially targeting $1.3360.
  • Momentum indicators remain bearish, and the 5-day moving average has crossed below the 20-day.

Key Points:

  • Sterling is weakening despite rising Gilt yields, showing a sustained inverse relationship.
  • Inflation is expected to accelerate further due to tax changes and base effects.
  • The labour market is cooling, reinforcing expectations of a rate cut.
  • Technical signals point to continued downside risk for the pound.
  • Market is heavily pricing in a BOE rate cut at the next meeting.

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