16/08/2025 Week Ahead

Shifting Monetary Paths Put Pressure on the U.S. Dollar

Key Takeaways:

  • US dollar weakened across major currencies, except the dollar bloc.
  • Markets considered a larger Federal Reserve cut, but expectations remain for 25 bps.
  • Preliminary August PMI data will have limited impact.
  • Jackson Hole symposium focuses on labor markets.
  • Reserve Bank of New Zealand likely to cut rates by 25 bps.
  • UK and Canada CPI data due, but no immediate policy changes expected.

The US dollar continued to decline, reversing gains from last month. It weakened against all G10 currencies except the dollar bloc, while its performance was more mixed against emerging markets. Investors briefly entertained the possibility of a 50 basis-point rate cut by the Federal Reserve next month. However, stronger-than-expected producer prices and resilient consumer spending, reflected in a 4 percent annualized retail sales growth over the past three months, kept futures pricing steady. The market still sees over a 90 percent probability of a 25 basis-point cut.

This week, preliminary August PMI data will be released, but the impact is likely to be minor. Market attention is shifting toward the Federal Reserve’s annual Jackson Hole symposium, which will address labor markets in transition, with a focus on demographics, productivity, and macroeconomic policy. These discussions may shape long-term expectations more than immediate policy moves.

Elsewhere, the Reserve Bank of New Zealand is widely expected to cut its policy rate by 25 basis points to 3.00 percent, with markets anticipating the terminal rate at 2.75 percent. In the UK and Canada, July CPI reports are due, but neither central bank is expected to adjust policy in September. Both will have more up-to-date data by their next meetings, making near-term moves unlikely.

United States of America

Overview

The dollar remains heavily influenced by US interest rate developments. This year, two- and ten-year yields have generally trended lower, with exceptions in May and July. This decline in yields has broadly aligned with weakness in the Dollar Index, which fell through the first half of the year before recovering in July. May was an outlier, when yields rose but the Dollar Index slipped only modestly. Recent commentary from Federal Reserve officials, combined with the inflation implications of stronger producer price data, has reduced speculation about the possibility of a larger 50 basis-point cut at the next FOMC meeting.

Looking ahead, the upcoming data flow is not expected to significantly alter expectations for September’s policy decision. Instead, the Jackson Hole symposium will be closely followed, with Chair Powell likely to focus on the labor market’s evolving balance between supply and demand. Housing data will contribute to Q3 growth forecasts, but existing home sales, PMI figures, and regional surveys such as the Philadelphia Fed are unlikely to shift the broader outlook. Minutes from the late July meeting will also be examined, especially after the market initially interpreted the decision to hold rates steady as hawkish, before subsequent employment data tempered that view.

The dollar’s recent weakness has brought the Dollar Index below key retracement levels. Although the index briefly threatened trendline support, it avoided a decisive break lower. With the market already pricing in a high probability of a 25 basis-point cut next month, further downside may be limited, and some consolidation is expected.

Economic Drivers

  • Dollar direction remains closely tied to US interest rates.
  • Decline in two- and ten-year yields has weighed on the Dollar Index.
  • Federal Reserve commentary and inflation signals dampened speculation of a larger rate cut.
  • Labor market dynamics remain central to policy, with focus on reduced labor supply and softer job growth.

Data and Events

  1. 19 August 2025: Building Permits
  2. 19 August 2025: Housing Starts
  3. 20 August 2025: FOMC Members Speak
  4. 21 August 2025: FOMC Meeting Minutes
  5. 21 August 2025: Unemployment Claims
  6. 21 August 2025: Philly Fed Manufacturing Index
  7. 21 August 2025: Flash Manufacturing & Services PMI
  8. 21 August 2025: Existing Home Sales
  9. 22 August 2025: Jackson Hole Symposium
  10. 22 August 2025: Fed Chair Powell Speaks
  11. 23 August 2025: Jackson Hole Symposium

Price Action

  • Dollar Index has fallen 2.6% since the August 1 peak.
  • Index overshot the 61.8% retracement of the July 1–August 1 rally.
  • Trendline support sits near 97.70, with deeper support around 97.10.
  • Market pricing suggests consolidation, as more than 90% odds of a 25 bp cut are already discounted.

Key Points:

  • Dollar remains highly sensitive to US yields and Fed policy outlook.
  • Markets have moved away from expecting a larger 50 bp cut.
  • Jackson Hole symposium is the main event this week.
  • Housing and PMI data will influence sentiment but not policy expectations.
  • Dollar Index shows weakness but risks stabilizing near support.

Australia & New Zealand

Overview

The Australian dollar remains closely tied to broader US dollar movements. Current correlations show a strong inverse relationship between the Australian dollar and the Dollar Index, with levels near the highest in a year. This sensitivity reinforces how external drivers, particularly shifts in US dollar performance, continue to dominate the Australian dollar’s outlook.

Domestically, last week’s 25 basis-point rate cut, which brought the policy rate down to 3.60 percent, was followed by the release of the labor market report. With these developments priced in, markets may show limited reaction to this week’s upcoming PMI and consumer inflation expectations survey. The July composite PMI rose for the second consecutive month, reaching 53.8, its highest reading in the current cycle. This improvement suggests underlying resilience in economic activity despite monetary easing.

Price action in the Australian dollar showed stability after brief weakness midweek. The currency found support near 0.6480 and recovered toward 0.6525 by the weekend. Resistance remains in the 0.6540–0.6550 region, while last week’s high near 0.6570 is a more significant technical marker.

Economic Drivers

  • Strong inverse correlation with the US dollar, highlighting external influence.
  • Correlation with the Canadian dollar also remains notable but less extreme.
  • Domestic monetary easing continues, with the policy rate now at 3.60 percent.
  • Recent PMI readings signal strengthening momentum in the domestic economy.

Data and Events

  1. 19 August 2025: PPI (NZD)
  2. 19 August 2025: Consumer Sentiment
  3. 20 August 2025: RBNZ Official Cash Rate
  4. 20 August 2025: RBNZ Monetary Policy Statement
  5. 20 August 2025: RBNZ Rate Statement
  6. 20 August 2025: RBNZ Press Conference
  7. 21 August 2025: Trade Balance (NZD)
  8. 21 August 2025: Flash Manufacturing & Services PMI
  9. 21 August 2025: Inflation Expectations

Price Action

  • Support held near 0.6480, with recovery to around 0.6525.
  • Resistance seen in the 0.6540–0.6550 range.
  • Stronger resistance at last week’s high near 0.6570.
  • Lack of follow-through selling suggests consolidation rather than new weakness.

Key Points:

  • Australian dollar remains strongly influenced by US dollar moves.
  • RBA’s recent rate cut has eased domestic policy settings.
  • PMI data points to an improving economic backdrop.
  • Market focus is on resistance levels at 0.6540–0.6570.
  • Short-term outlook suggests stability and consolidation.

Canada

Overview

The Canadian dollar continues to trade in line with the broader moves of the US dollar. Correlation measures show that the relationship between the USD/CAD exchange rate and the Dollar Index is at its strongest in over a year, highlighting the extent to which Canadian dollar movements remain externally driven. Correlations with equities have been weaker, with only a slight link to the S&P 500. By contrast, the currency has shown an improved correlation with oil prices, though in recent sessions it has been the US dollar rather than the Canadian dollar that has tracked crude more closely.

On the domestic front, Canada’s upcoming July CPI release is the key event of the week. While headline inflation is set to ease due to base effects, core measures remain firm, keeping attention on the Bank of Canada’s longer-term stance. Portfolio flow data will also be reported, though these figures have historically had little immediate impact on the currency. Markets remain focused on the weaker-than-expected July jobs data earlier this month, which reinforced expectations for a rate cut later this year.

Technically, the US dollar strengthened against the Canadian dollar last week, reaching important retracement levels and closing at the month’s highs. Momentum remains supportive, with risks tilted toward another test of the early August peak.

Economic Drivers

  • Strong correlation between USD/CAD and the Dollar Index, near the highest in over a year.
  • Oil price movements remain an influence, though recent sessions have seen the US dollar track crude more closely than the Canadian dollar.
  • Weak July employment report has reinforced expectations for a Bank of Canada rate cut in December.
  • Portfolio flow trends show foreign investors moving out of Canadian assets in 2025, reversing strong inflows from 2024.

Data and Events

  1. 18 August 2025: Housing Starts
  2. 19 August 2025: CPI
  3. 22 August 2025: Retail Sales

Price Action

  • US dollar advanced to CAD1.3820, the 61.8% retracement of the August decline.
  • Resistance sits near CAD1.3880, the August 1 high.
  • Support remains around CAD1.3720.
  • Moving averages point higher, though momentum signals are not strong.

Key Points:

  • Canadian dollar remains highly sensitive to US dollar direction.
  • July CPI will provide the main domestic driver this week.
  • Oil correlations remain relevant but have shifted toward the US dollar.
  • Weaker jobs data underpin rate cut expectations for December.
  • USD/CAD remains biased upward toward resistance levels.

China

Overview

The yuan remains managed closely against the US dollar, with Beijing showing no signs of shifting its currency policy. While some claim the yuan is undervalued, the broader reality is that most G10 currencies, apart from the Swiss franc, also appear undervalued under OECD purchasing power parity measures. This reflects the strength of the dollar more than any deliberate yuan weakness.

This week brings limited Chinese economic data, and markets expect the one-year and five-year loan prime rates to remain unchanged at 3.0 percent and 3.5 percent respectively. Recent industrial output and retail sales figures came in weaker than expected, but weather-related disruptions such as heatwaves, heavy rains, and floods likely explain much of the slowdown. As a result, Beijing is not under immediate pressure to add new fiscal or monetary support, preferring to let existing measures take effect.

In currency markets, the yuan has been stable within a narrow trading band since late May. The People’s Bank of China has set the US dollar’s daily reference rate at its lowest since November, while adjusting the fix more actively than earlier in the year. Despite criticism, the yuan has steadily gained against the dollar in recent months, with losses in only four weeks since late April. The debate is less about the yuan’s direction and more about the gradual pace of adjustment.

Economic Drivers

  • Beijing continues to tightly manage the yuan’s value against the dollar.
  • OECD data shows most major currencies are undervalued relative to the dollar, not only the yuan.
  • Industrial and retail weakness in July was partly weather-driven, reducing urgency for new policy action.
  • Fiscal measures already in place are expected to continue without major adjustments.

Data and Events

  1. 19 August 2025: Foreign Direct Investment
  2. 20 August 2025: 1-y & 5-y Loan Prime Rate

Price Action

  • Yuan has traded in a stable CNH7.15–CNH7.20 range since late May.
  • PBOC has set the dollar reference rate at its lowest since November.
  • Daily fix adjustments have increased in scale compared to earlier in the year.
  • Dollar has fallen against the yuan in all but four weeks since late April.
  • Key moving averages (20-day and 50-day) are converging near CNH7.18.

Key Points:

  • Yuan stability remains a deliberate policy choice by Beijing.
  • Broader undervaluation reflects dollar strength, not yuan weakness.
  • Loan prime rates are expected to remain steady this week.
  • Domestic data weakness attributed largely to weather disruptions.
  • Dollar-yuan trading remains confined to a tight range.

Europe

Overview

The euro continues to benefit from its position as the most liquid alternative to the US dollar. Correlation patterns highlight how closely its performance is tied to US rates. The inverse relationship with the US two-year yield is particularly strong, standing near -0.70, among the sharpest since the pandemic. Even on a longer 60-day basis, the correlation remains significant, reflecting the dominance of US monetary conditions over euro movements. In comparison, the euro’s link with German short-term yields has been weaker.

This week’s eurozone data releases are unlikely to meaningfully alter market expectations. Preliminary August PMI figures, June trade and construction data, and Q2 wage settlements will be reported. Wages had risen at their slowest pace since late 2021 in Q1, underscoring softer inflationary pressures. However, given the high bar for further easing, the European Central Bank is not expected to respond immediately. Market pricing reflects this, with only a small probability of a rate cut at the September meeting and slightly higher odds for late October.

The euro has extended its recovery from last month’s decline, climbing back above $1.17 and regaining most of its recent losses. Market focus is on whether the currency can break resistance near $1.1750, with stronger resistance near the late-July peak. A close below $1.1600 would weaken the technical outlook.

Economic Drivers

  • Euro remains the primary alternative to the US dollar, benefiting from liquidity status.
  • Strong inverse correlation with US two-year yields underscores the impact of US policy on euro performance.
  • Wage growth has moderated, easing inflationary concerns.
  • ECB remains cautious, with little immediate appetite for further rate cuts.

Data and Events

  1. 18 August 2025: Trade Balance
  2. 19 August 2025: Current Account
  3. 20 August 2025: German PPI
  4. 20 August 2025: Final CPI
  5. 21 August 2025: Flash Manufacturing & Services PMI
  6. 21 August 2025: Consumer Confidence
  7. 22 August 2025: German Final GDP

Price Action

  • Euro rebounded to $1.1730, recovering over three-quarters of its recent decline.
  • Resistance at $1.1750 trendline, followed by late-July high near $1.1790.
  • Support seen at $1.1600, with a break lower weakening sentiment.
  • Recovery trend intact unless key support fails.

Key Points:

  • Euro performance remains heavily tied to US yields.
  • ECB unlikely to act soon despite softer wage growth.
  • Data releases this week lack the weight to shift policy expectations.
  • Euro recovery targets resistance near $1.1750–$1.1790.
  • A break below $1.1600 would turn sentiment weaker.

Japan

Overview

The yen remains highly sensitive to US interest rates, with correlations near their strongest in more than a year. The exchange rate is currently more aligned with US two-year yields than ten-year yields, an unusual shift from historical patterns. This reinforces the yen’s position as a proxy for relative US policy expectations rather than domestic conditions.

Japan’s upcoming data releases are unlikely to carry major weight. GDP has already been reported, leaving focus on the July trade balance and CPI. The trade deficit has narrowed significantly over the past two years, although exports are expected to have fallen for a third consecutive month in July. Inflation is expected to ease slightly, with headline and core rates likely dipping to around 3.1 percent. Despite an undervalued yen, Japan continues to run trade deficits, reflecting both weak exports and high import costs.

Markets are monitoring commentary on the Bank of Japan’s stance. Recent US comments suggested that the BOJ risks lagging behind inflation trends, though market pricing for further tightening remains modest. Expectations for October remain in focus, with swaps markets discounting only a small degree of additional tightening.

Economic Drivers

  • Yen performance remains closely tied to US rate movements, especially two-year yields.
  • Trade deficits persist despite a weaker yen, though the overall shortfall has narrowed compared to previous years.
  • Inflation pressures are easing slightly, with headline and core CPI expected to dip.
  • Market speculation continues over the Bank of Japan’s readiness to tighten policy further.

Data and Events

  1. 20 August 2025: Core Machinery Orders
  2. 20 August 2025: Trade Balance
  3. 21 August 2025: Flash Manufacturing PMI
  4. 22 August 2025: National Core CPI

Price Action

  • Dollar turned back from JPY148.50, just below key retracement resistance.
  • Last week’s low was near JPY146.20, with risk of testing JPY145.85 support.
  • Broader resistance remains at JPY151, the August 1 high.
  • Market pricing shows modest tightening expectations, with October seen as the likely window.

Key Points:

  • Yen remains heavily driven by US yields, with correlations at unusually high levels.
  • Trade deficit persists, though the shortfall has narrowed over time.
  • Inflation easing to around 3.1% keeps pressure modest on the BOJ.
  • Market attention is on whether October delivers BOJ tightening.
  • Dollar-yen faces resistance at 148.50 and support near 146.20–145.85.

United Kingdom

Overview

Sterling has been supported by a combination of domestic policy moves and stronger economic data. Earlier this month, the Bank of England delivered what was seen as a hawkish cut, reducing the base rate while at the same time raising near-term inflation forecasts. Governor Bailey’s cautious forward guidance reinforced the message. This policy shift was quickly followed by stronger-than-expected Q2 GDP, driven by government spending, and a solid jobs report. These developments have led markets to raise expectations for the year-end policy rate, which now stands near 3.82 percent, up from 3.68 percent at the start of the month.

Sterling also remains sensitive to the US dollar’s performance, with short-term correlations showing a strong inverse relationship to the Dollar Index. The broader policy backdrop, combined with firm domestic data, has positioned the pound for further gains, although upcoming releases may determine whether the momentum can be sustained.

Economic Drivers

  • Bank of England’s hawkish cut raised near-term inflation expectations despite a rate reduction.
  • Stronger Q2 GDP growth supported by government spending.
  • Labor market data mostly beat expectations, reinforcing resilience.
  • Market-implied year-end policy rate has risen to 3.82 percent.
  • Sterling remains highly correlated with moves in the US dollar.

Data and Events

  1. 20 August 2025: CPI
  2. 21 August 2025: Flash Manufacturing & Services PMI
  3. 22 August 2025: Retail Sales

Price Action

  • Sterling extended its recovery from the August 1 low near $1.3140 to almost $1.3600.
  • The currency has retraced more than 61.8% of its July losses.
  • Price action broke above the downtrend line from July highs, confirming technical strength.
  • Moving averages and momentum indicators point higher.
  • Limited resistance until the July 1 multi-year high near $1.3790, though consolidation risk remains.

Key Points:

  • Bank of England’s hawkish cut has underpinned sterling strength.
  • Stronger GDP and jobs data reinforced positive sentiment.
  • CPI, PMI, and retail sales will shape near-term direction.
  • Sterling momentum remains constructive, with gains toward $1.3790 possible.
  • Short-term consolidation likely given the extent of recent gains.

SKONE Enterprise provides expert market analysis and forecasts. Our insights help traders and investors navigate the complex currency landscape.

© 2025 SKONE Enterprise (003319453-V). All rights reserved.

The content on this site is for informational purposes only and does not constitute financial advice.