20/07/2025 Week Ahead
PMI Data, ECB Decision & U.S. Tariff Signals
Key Takeaways:
- US dollar gained last week, but its upside momentum may be fading.
- Market volatility surged after rumors of Fed Chair Powell’s potential dismissal.
- Fed Governor Waller supports a rate cut, but broader consensus is lacking.
- Flash PMIs, ECB decision and Tokyo CPI are key events this week.
- US tariff policy remains unpredictable, with potential implications for trade and EV development.
The US dollar appreciated broadly last week, rising against both G10 and most emerging market currencies. However, its recent gains appear to be losing momentum. US yields, particularly the two-year and 10-year, pulled back despite early strength. The 10-year yield failed to breach the 4.50% level, suggesting resistance at that threshold. This softening in yields aligns with a potentially exhausted dollar rally.
Midweek volatility was driven by speculation that President Biden might fire Federal Reserve Chair Jerome Powell. The rumors, partially fueled by statements from within the White House, triggered sharp reactions in both currency and equity markets. However, the situation quickly calmed following official denials. The dollar recovered, as did risk sentiment.
Meanwhile, Federal Reserve Governor Christopher Waller reiterated support for a rate cut later this month. Despite his influence, there is little sign that other FOMC members are aligned with this view. The probability of a September rate cut has fallen to around 63%, close to its lowest level this year, potentially marking a temporary floor for expectations.
Looking ahead, the flash July PMI figures will provide insights into economic momentum across major economies. The European Central Bank is expected to leave rates unchanged, maintaining its wait-and-see approach into the fourth quarter. In Japan, Tokyo's July CPI is forecast to decline slightly, marking the first potential back-to-back drop in the core rate this year. Markets are not expected to react significantly to Japan’s upper house election results.
Trade tensions could escalate again, depending on signals from the US administration. The use of tariffs under the current administration has extended beyond trade disputes, influencing foreign policy. The newly announced 160% tariff on graphite imports from China raises concerns over its impact on the US electric vehicle battery supply chain. With import prices showing no signs of deflation, it appears that foreign producers are not absorbing these duties, leaving US firms exposed to rising input costs.
United States of America
Overview
The US dollar experienced a sharp selloff last week amid speculation that President Trump might dismiss Fed Chair Powell. While the immediate political risk has faded, this episode appears to have marked the turning point in the dollar's recent upside correction. The greenback’s gains had been supported by a steady rise in US interest rates, with the year-end Fed funds rate now projected at 3.90%, the highest in five months.
Market pricing has adjusted accordingly, with the probability of a September rate cut falling to its lowest point this year. This shift reflects a growing divergence between short-term policy expectations and actual economic performance. Notably, the correlation between dollar-yen movements and the US 10-year yield has reached its highest level since 2021, reinforcing the market's sensitivity to rate dynamics.
Although high-frequency data will be released throughout the coming week, most of it consists of surveys, which the Fed has recently discounted in policy relevance. The focal point will be the second-quarter GDP release on 30 July, which comes just hours before the FOMC meeting concludes. Forecasts suggest the economy expanded at a moderate annualised pace of 2.1%, though the Atlanta Fed’s tracker points to a slightly stronger 2.4%. Bloomberg’s growth surprise index also ticked higher last week after hitting a low not seen since August 2023.
Meanwhile, the Dollar Index extended its recovery from early July lows, reaching as high as 98.95. However, dovish remarks from Governor Waller, who signalled openness to a near-term rate cut, could cap further upside. A decisive move below the 97.65–97.70 area would likely confirm the end of this corrective rally.
Economic Drivers
- Fading political risk following Powell dismissal speculation removed short-term dollar pressure.
- US rates have continued to rise, with year-end Fed funds rate now projected at 3.90%.
- Odds of a September Fed rate cut have declined to the lowest level of the year.
- Dollar-yen and 10-year yield correlation is the strongest since 2021.
- Economic sentiment is stabilising, as seen in growth surprise indices and GDP trackers.
Data and Events
- 22 July 2025: Fed Chair Powell Speaks.
- 22 July 2025: Richmond Manufacturing Index.
- 23 July 2025: Existing Home Sales.
- 23 July 2025: Crude Oil Inventories.
- 24 July 2025: Unemployment Claims.
- 24 July 2025: Flash Manufacturing & Services PMI.
- 24 July 2025: New Home Sales.
- 25 July 2025: Durable Goods Orders.
Price Action
- Dollar Index reached 98.95, continuing rebound from 96.35 low on 1 July.
- Short-term resistance remains near the 98.95 level.
- Potential trend reversal signaled if price breaks below the 97.65–97.70 area.
- Market focus is now on whether recent dovish Fed commentary halts rate-driven gains.
Key Points:
- Dollar's upside correction may be ending as political risks ease and rates stabilise.
- Q2 GDP data and FOMC meeting are key macro catalysts in the week ahead.
- Fed rate cut expectations have moderated, lowering September odds.
- Strong rate correlation with dollar-yen underscores market sensitivity to yields.
- A break below 97.65 could mark the end of the current dollar rally.
Australia & New Zealand
Overview
The Australian dollar remains influenced by shifting global correlations, with its movements now less strongly tied to major commodity prices and the broader dollar index compared to earlier in the year. In early July, the AUD’s 30-day inverse correlation with the Dollar Index touched its strongest level of the year before easing slightly. Its correlation with the Canadian dollar has since tightened, suggesting a shared response to global macro drivers. Meanwhile, the strong historical relationship between the AUD and copper prices has weakened, and its brief positive link to gold has turned slightly inverse.
The Reserve Bank of Australia's recent decision to hold rates steady surprised markets, but attention is now on the meeting minutes due this week. Governor Bullock signalled that the decision was a matter of timing, not direction, and the futures market is now pricing in a quarter-point cut in August followed by another cut later in the year. Preliminary PMI data will also offer insight into current economic momentum. The composite PMI held firm at 51.6 in June, matching the yearly high, while manufacturing showed a moderate decline over the quarter but still posted the strongest average since Q4 2022.
Despite a midweek drop to around $0.6455, the Australian dollar recovered as the US dollar weakened into the weekend. The recovery helped limit the weekly loss to 0.60%, marking the first weekly decline in a month. The rebound was technically constructive, although momentum remains overstretched and raises caution for near-term strength.
Economic Drivers
- AUD’s inverse correlation with the Dollar Index eased from extreme levels.
- Strengthened inverse correlation with the Canadian dollar suggests common macro pressures.
- AUD’s correlation with copper has weakened after peaking in mid-June.
- Slightly inverse correlation with gold, down from a 12-month high in April.
- Market confidence in RBA rate cuts in Q3 and Q4 following Bullock’s dovish tone.
Data and Events
- 21 July 2025: CPI. (NZD)
- 22 July 2025: Trade Balance. (NZD)
- 22 July 2025: Monetary Policy Meeting Minutes.
- 24 July 2025: Flash Manufacturing & Services PMI.
- 24 July 2025: RBA Gov Bullock Speaks.
Price Action
- AUD dropped to $0.6455, breaching the 61.8% retracement of the June rally.
- Rebounded to nearly $0.6450 as US dollar weakened into the weekend.
- Weekly close was lower by approximately 0.60%, the first decline in four weeks.
- Price structure is mildly supportive, but momentum signals remain overbought.
Key Points:
- AUD’s correlation to commodities and other currencies is shifting, reducing its predictive clarity.
- RBA minutes will be closely watched for confirmation of expected Q3 rate cut.
- PMI data will test the resilience of economic momentum seen in June.
- Price action suggests limited downside, but overstretched momentum limits upside.
- Traders are positioning for policy easing in both Q3 and Q4.
Canada
Overview
The Canadian dollar continues to closely track the broader performance of the US dollar. The 30-day correlation between movements in the CAD-USD exchange rate and the US Dollar Index has strengthened significantly since early this year. From a weak 0.20 reading in February, it has held above 0.60 since late April and is now approaching 0.70, reinforcing the loonie's dependence on global dollar trends rather than domestic factors.
Two key releases are on the agenda this week. First, the Bank of Canada's Q2 business survey may provide insights into corporate sentiment during May, a month marked by strong full-time job growth and an encouraging jump in composite PMI. While both indicators could support optimism, any positive interpretation may be overshadowed by recent disruptions in the US, which are likely to dilute the survey’s market impact. The second focus will be May retail sales. In April, the headline figure was lifted by auto sales, masking an underlying drop. Early indications suggest sales volumes remained relatively stable in May, though growth momentum appears limited.
The Canadian dollar weakened by roughly 1.6% against the US dollar since early July, with the exchange rate rising from CAD1.3555 to nearly CAD1.3775. The area around CAD1.38 is considered technically significant. A support zone formed between CAD1.3670 and CAD1.3680, with a move below CAD1.3640 likely confirming a shift away from the recent USD rally.
Economic Drivers
- CAD remains highly correlated with broader US dollar movements, limiting independent direction.
- Business sentiment in Q2 likely supported by May's strong job growth and PMI rebound.
- Sentiment also influenced by early optimism tied to the new government.
- Weak retail performance masked by auto sales in April, with stable volume trends in May.
- Rising US uncertainty could limit positive spillovers from domestic data.
Data and Events
- 21 July 2025: BOC Business Outlook Survey.
- 24 July 2025: Retail Sales.
Price Action
- USDCAD climbed 1.6% since early July, reaching nearly CAD1.3775.
- Key resistance area remains around CAD1.38.
- Support formed near CAD1.3670–1.3680 in recent sessions.
- Break below CAD1.3640 would likely signal an end to the USD's upward correction.
Key Points:
- CAD continues to mirror US dollar trends with strong correlation.
- Q2 business sentiment may show resilience but faces external drag.
- May retail sales expected to show subdued underlying demand.
- Technically, CAD remains under pressure unless support at 1.3640 holds.
- Broader US developments remain the dominant driver for the loonie.
China
Overview
The People's Bank of China continues to guide the yuan on a path of modest appreciation against the US dollar. The movement so far this year has been relatively limited, with the currency gaining about 1.7% year-to-date. Despite this mild shift, the yuan remains closely aligned with the dollar, reflecting a policy preference for stability rather than directional bias.
The PBOC has allowed for steady demand-driven flows to influence the yuan without making abrupt adjustments. Banks’ foreign exchange activity with customers (not other financial institutions) shows that clients were net buyers of yuan over the last three months through May, a reversal from the prior three-month period. These flows reflect broader currency trends, particularly the weakening of the US dollar during that time.
Loan Prime Rates are expected to remain unchanged this month, at 3% for the one-year and 3.50% for the five-year benchmarks. The central bank has not signalled any shift in policy, maintaining a cautious stance while monitoring global developments and domestic liquidity needs.
On the price front, the yuan has been trading in a narrow band between CNH7.15 and CNH7.20 since early June. While the US dollar has regained some ground globally this month, the yuan has remained resilient, declining by less than 0.2%. This performance makes it one of the most stable currencies in the market, outpacing both G10 and most emerging market peers. The data supports Beijing's ongoing strategy of maintaining currency stability rather than targeting strength or weakness.
Economic Drivers
- PBOC continues to guide a gradual and controlled appreciation of the yuan.
- Year-to-date appreciation of the yuan stands at roughly 1.7%, with limited volatility.
- FX settlement data shows banks' clients have been net buyers of yuan for three consecutive months.
- Policy focus remains on currency stability, not directional movement.
- Loan Prime Rates are expected to remain steady amid cautious policy stance.
Data and Events
- 21 July 2025: 1-y & 5-y Loan Prime Rate.
- 21 July 2025: Foreign Direct Investment.
Price Action
- Yuan has traded in a tight range between CNH7.15 and CNH7.20 since early June.
- Despite a stronger US dollar this month, the yuan declined less than 0.2%.
- Outperformed all G10 currencies and most EM currencies during the same period.
- Price action reinforces the view of managed stability around the current band.
Key Points:
- PBOC maintains a stable yuan policy with limited directional bias.
- Currency appreciated modestly in 2025, tracking broader dollar moves.
- Clients of Chinese banks remain net buyers of yuan, reflecting dollar softness.
- Loan Prime Rates are likely to remain unchanged this week.
- Yuan's resilience highlights Beijing’s strategy of currency stability.
Europe
Overview
The European Central Bank will meet on 24 July, but no changes to interest rates are expected. President Lagarde is unlikely to offer any strong forward guidance either, as recent data has not made a convincing case for additional policy moves. Despite ongoing speculation, a rate cut in September appears increasingly improbable, particularly given the widening interest rate gap between the US and Germany. Since the end of June, the US two-year yield premium over Germany has increased by nearly 20 basis points, reinforcing the market’s cautious stance toward euro strength.
Although some indicators hint at gradual economic traction, expectations for second-quarter growth remain muted. Preliminary Q2 GDP data is due on 30 July, and forecasts suggest the eurozone economy likely stagnated following a 0.6% expansion in Q1. This contrasts with a modest improvement in the composite PMI, whose Q2 average was slightly higher than in the previous quarter, hinting at stabilisation but not enough to drive strong growth expectations.
On the currency side, the euro is undergoing its fourth significant downside correction this year. Each of the previous three pullbacks averaged around 3.4%, with this latest decline now at approximately 2.3%. As long as the $1.1555 level holds, the outlook remains cautiously constructive. A rebound above $1.1660 would likely improve sentiment, while a break through the $1.1720–1.1725 zone could confirm that a near-term low has been established.
Economic Drivers
- No policy change expected at the ECB’s July meeting.
- Lagarde’s forward guidance likely to remain limited.
- A September rate cut appears unlikely under current conditions.
- US-German two-year yield spread widened by nearly 20 basis points since late June.
- PMIs suggest mild economic improvement, but not enough to lift GDP forecasts.
Data and Events
- 23 July 2025: German 10-y Bond Auction.
- 23 July 2025: Consumer Confidence.
- 24 July 2025: Flash Manufacturing & Services PMI.
- 24 July 2025: Main Refinancing Rate.
- 24 July 2025: Monetary Policy Statement.
- 24 July 2025: ECB Press Conference.
- 25 July 2025: German ifo Business Climate.
Price Action
- Ongoing euro correction is the fourth this year lasting more than a week.
- Current decline is around 2.3%, below the 3.4% average of past corrections.
- Key support is seen at $1.1555, which if held, keeps the structure constructive.
- Recovery above $1.1660 may steady the tone; $1.1720–1.1725 break needed for stronger confirmation.
Key Points:
- ECB is expected to leave rates unchanged, with limited guidance from Lagarde.
- September rate cut looks increasingly unlikely amid widening US-EU yield spread.
- Q2 GDP likely flat despite modest PMI gains.
- Euro correction remains contained for now, with key technical levels in focus.
- Broader sentiment hinges on holding support and signs of stabilisation.
Japan
Overview
Japan’s political landscape may shift slightly following the upper house election on 20 July. The ruling Liberal Democratic Party and its coalition partner, Komeito, lost their majority in the lower house last year and now face a similar risk in the upper house. While the election results are expected before markets open on Monday, the overall policy direction is unlikely to change. However, a poor performance could increase internal pressure on Prime Minister Ishiba and potentially spark a leadership challenge within the LDP later this year.
On the economic front, the correlation between the dollar-yen exchange rate and the US 10-year yield has strengthened, currently around 0.80, its highest level since late 2021. This underscores the yen’s sensitivity to movements in US rates. Although Japan’s PMI data typically receives little market attention, the July flash reading will be released on 24 July. The composite PMI rose to 51.5 in June, a three-month high, but the Tokyo CPI release on 25 July will carry more weight. Headline and core inflation stood at 3.1% in June, with expectations for both to decline slightly for a second consecutive month.
The dollar-yen pair traded within a wide range last week between JPY146.90 and JPY149.20, particularly during volatility linked to US political drama. The greenback has climbed over 4.5% from its 1 July low, approaching but not surpassing the 200-day moving average near JPY149.70, a level it has not broken above in five months. With the US 10-year yield stalling again near 4.50%, the balance of risk suggests that any break from the current range may lean toward the downside.
Economic Drivers
- Coalition may lose upper house majority, but policy continuity remains likely.
- Weak electoral showing could trigger leadership pressure on Prime Minister Ishiba.
- Dollar-yen correlation with US 10-year yield has risen to 0.80, highest since 2021.
- Tokyo CPI is more closely watched than PMI data and guides national inflation outlook.
- Headline and core inflation expected to ease slightly from June’s 3.1% level.
Data and Events
- 23 July 2025: BOJ Core CPI.
- 24 July 2025: Flash Manufacturing PMI.
- 25 July 2025: Tokyo Core CPI.
Price Action
- Dollar-yen traded between JPY146.90 and JPY149.20 during last week’s volatility.
- Greenback rose more than 4.5% from 1 July low but failed to break JPY149.70 resistance.
- US 10-year yield peaked near 4.50%, stalling again at that level.
- Break from the current range likely to be to the downside if yields remain capped.
Key Points:
- Japanese election outcome may impact political leadership but not economic policy.
- Yen remains highly sensitive to US interest rate movements.
- Inflation expected to ease slightly, reinforcing BOJ’s cautious stance.
- Dollar-yen remains rangebound, with downside risks if yields pull back.
- Market focus turns to Tokyo CPI for forward inflation guidance.
United Kingdom
Overview
Sterling continues to show a strong inverse relationship with the US Dollar Index, with the 30-day rolling correlation currently around -0.76. Although this is off the extreme of nearly -0.90 seen last month, the negative correlation remains significant. Beyond broader dollar dynamics, the British pound is also reacting to mounting concerns over the UK’s fiscal and economic outlook. Economic performance has been softer than expected, with signs of broad-based weakness across key sectors.
While the slowdown from the robust 0.7% growth rate in Q1 was anticipated, recent data point to a more pronounced deceleration. The labour market is losing steam, manufacturing output has declined for three consecutive months through May, and service sector activity has remained broadly stagnant this year. The Bank of England has adopted a gradual easing stance, and markets are pricing in two rate cuts for the remainder of 2025. However, weaker growth complicates the government’s efforts to honour both its tax commitments and fiscal rules.
Several important data releases are scheduled this week, including retail sales and flash PMIs. Retail sales volumes plunged 2.7% in May, more than offsetting April’s 1.3% gain, and another weak reading could further dampen sentiment. Meanwhile, the Rightmove house price index declined 0.3% in June, the first fall this year, while base effects could lift July’s year-on-year comparison. The government’s June budget release will also be closely watched due to ongoing fiscal credibility concerns.
In the FX space, sterling may have found short-term support in the $1.3365–1.3375 region. A break above $1.3485 could help stabilise sentiment, while further gains past $1.3525–1.3530 would increase the likelihood that the latest correction has run its course. However, momentum indicators remain overstretched and recent economic data has been persistently negative.
Economic Drivers
- Rolling 30-day correlation between sterling and Dollar Index remains strongly inverse at -0.76.
- UK economy is underperforming, with signs of broad-based weakness.
- Labour market conditions are softening, and manufacturing output is contracting.
- Services sector activity has been mostly flat throughout the year.
- BOE signals gradual policy easing; markets expect two cuts by year-end.
- Weaker growth complicates government efforts to maintain fiscal credibility.
Data and Events
- 22 July 2025: BOE Gov Bailey Speaks.
- 24 July 2025: Flash Manufacturing & Services PMI.
- 25 July 2025: Retail Sales.
Price Action
- Sterling found support in the $1.3365–1.3375 range in recent sessions.
- A move above $1.3485 may stabilise technical tone.
- Break through $1.3525–1.3530 would suggest correction is likely complete.
- Momentum indicators remain overextended following a string of weak data.
Key Points:
- UK economic data continues to underwhelm across labour, manufacturing and retail.
- Sterling remains sensitive to US dollar trends and UK fiscal developments.
- BOE expected to cut rates gradually, with two moves priced in for 2025.
- Budget release and retail sales will be critical sentiment drivers this week.
- Sterling at risk unless data surprises positively and key resistance levels are cleared.
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