05/07/2025 Week Ahead

Tariffs Return to Forefront as Markets Await Central Bank Decisions

Key Takeaways:

  • The Trump administration is preparing to announce new bilateral tariffs after a 90-day pause.
  • Early signs show modest price increases due to tariffs, with US import prices rising slightly.
  • Fed Chair Powell confirms tariffs are likely to lift inflation in coming months.
  • Despite a strong labor market, a September Fed rate cut is still probable.
  • The Reserve Bank of Australia is expected to cut rates this week, while the Reserve Bank of New Zealand is likely to hold steady.

The week ahead marks the conclusion of a 90-day pause on US tariff measures as the Trump administration plans to notify trading partners of new bilateral tariffs for US importers. These letters are expected to set the tone for the next stage of America’s evolving foreign economic strategy, following judicial victories and a cease-fire agreement between Israel and Iran.

Although the broader impact of tariffs has so far appeared contained, early indicators suggest some pass through to consumer prices. US import prices, excluding oil, increased by an average of 0.3% during April and May, compared to just 0.1% over the previous year. Federal Reserve Chair Powell has noted these tariffs will likely push inflation higher in the coming months, suggesting that without this upward pressure, the Fed might have continued its rate-cutting path this year.

However, the resilience of the US labor market supports the Fed’s patient stance, though markets continue to see a September rate cut as the most probable outcome. Beyond the United States, attention will turn to central banks in Australia and New Zealand. The Reserve Bank of Australia is widely expected to cut rates, whereas the Reserve Bank of New Zealand is likely to hold for now, though its easing cycle is not considered complete.

United States of America

Overview

The US dollar’s recent weakness reflects a combination of shifting positions and concerns about the reliability of American economic policy. Investors have been moving away from overweight US dollar and equity positions, while trade tensions persist despite existing agreements. The administration’s aggressive stance on tariffs, even toward free-trade partners, has reinforced perceptions of policy unpredictability. There is also renewed debate about whether monetary policy should remain independent of executive influence. At the same time, expectations are rising that the Federal Reserve will resume its rate-cutting path just as other G10 central banks finish or nearly finish their easing cycles.

The week ahead will be shaped by a thin set of high-frequency economic reports sandwiched between last week’s disappointing employment data and next week’s inflation and retail sales updates. Despite signs of household financial stress, consumer credit expanded sharply in April, outpacing the entire first quarter. The market will also focus on the minutes of the June FOMC meeting, which may clarify the balance of opinion on interest rate cuts. Additionally, the June federal deficit report will be in focus after a notable year-on-year improvement. Forecasts still expect a deficit of around 6.5% of GDP, slightly below last year.

Economic Drivers

  • Position adjustments away from US dollar and US equities as portfolios rebalance.
  • Persistent tariff policies against both free-trade partners and deficit countries.
  • Concerns about monetary policy independence under the administration’s leadership.
  • Expectations of renewed Federal Reserve rate cuts while G10 central bank easing concludes.

Data and Events

  1. 09 July 2025: Consumer Credit.
  2. 09 July 2025: Crude Oil Inventories.
  3. 10 July 2025: 10-y Bond Auction.
  4. 10 July 2025: FOMC Meeting Minutes.
  5. 10 July 2025: Unemployment Claims.
  6. 11 July 2025: 30-y Bond Auction.
  7. 11 July 2025: FOMC Members Speaks.

Price Action

  • Dollar Index correction could extend toward the 38.2% retracement near 97.55, with last week’s high just above 97.40.
  • Further retracement levels include 50% near 97.90 and the 20-day moving average around 98.00.
  • A break below the 1 July low at 96.40 may signal another downward push, with stronger support closer to 95.00.

Key Points:

  • Dollar weakness reflects portfolio shifts, tariff tensions, and questions over Fed independence.
  • Markets anticipate the Fed will cut rates as other G10 easing cycles conclude.
  • Consumer credit and the federal deficit will be closely watched this week.

Australia & New Zealand

Overview

The Reserve Bank of Australia is widely considered the most dovish among the G10 central banks for the second half of 2025, with at least three rate cuts fully priced in by markets. Despite this, the Australian dollar surged to a seven-month high at the end of June, largely reflecting movements in the US dollar rather than domestic strength. The strong inverse correlation between the Australian dollar and the Dollar Index has remained close to 0.75, compared to below 0.35 in early February before the renewed US tariff threats.

Markets expect the Reserve Bank of Australia to deliver its third consecutive quarter-point rate cut this week, bringing its cash target rate to 3.65 percent. Futures indicate at least two further cuts this year. By contrast, the Reserve Bank of New Zealand has already reduced its cash rate by 225 basis points since last August. While a further cut is seen as less likely, the risk of a surprise policy move is higher in New Zealand compared to Australia, reflecting the RBNZ’s more flexible policy posture.

Economic Drivers

  • The Reserve Bank of Australia’s dovish stance with multiple cuts expected.
  • Strong inverse correlation between the Australian dollar and the Dollar Index.
  • Changing global perceptions of the US dollar influencing Australian dollar performance.
  • The Reserve Bank of New Zealand potentially surprising markets after significant prior easing.

Data and Events

  1. 08 July 2025: Cash Rate.
  2. 08 July 2025: RBA Rate Statement.
  3. 08 July 2025: RBA Press Conference.
  4. 09 July 2025: RBNZ Official Cash Rate.
  5. 09 July 2025: RBNZ Rate Statement.

Price Action

  • Australian dollar met resistance near 0.6600 and posted its lowest close of the week near 0.6550.
  • A clear break of 0.6535 could target 0.6500 where the 38.2 percent retracement is located.
  • The 20-day moving average is close to 0.6520, with the next retracement around 0.6480.

Key Points:

  • RBA expected to deliver a third rate cut, with more likely to follow.
  • Australian dollar strength tied closely to US dollar weakness.
  • RBNZ less likely to cut but retains potential to surprise markets.
  • Price levels show technical resistance near 0.6600 and support around 0.6500.

Canada

Overview

Canada’s currency dynamics have been closely linked to the US dollar in recent months. At the start of the year, the rolling 30-day correlation between the Dollar Index and the Canadian dollar was quite low, but it steadily climbed to around 0.80 by May and remains strong. Meanwhile, Canadian trade talks with the United States have gained momentum following Prime Minister Carney’s bargaining push on the digital tax issue, with hopes of concluding an agreement by July 21.

The domestic labor market continues to show signs of strain. Canada’s unemployment rate has risen from 5.7 percent at the beginning of 2024 to 7 percent by May this year, while the participation rate has slipped slightly. Job creation has slowed considerably compared to the same period last year, although a majority of the new positions remain full-time roles. This weak employment backdrop could influence monetary and fiscal policy in the months ahead.

Economic Drivers

  • Strengthening correlation between the Canadian dollar and the US dollar.
  • Progress in US-Canada trade negotiations, with a deal targeted by late July.
  • Prime Minister Carney’s positioning on the digital tax issue aiding trade discussions.
  • A weakening Canadian labor market with rising unemployment and slowing job growth.

Data and Events

  1. 08 July 2025: Ivey PMI.
  2. 11 July 2025: Employment Change.
  3. 11 July 2025: Unemployment Rate.
  4. 11 July 2025: Building Permits.

Price Action

  • The Canadian dollar was the second strongest G10 performer last week, gaining 0.65 percent against the US dollar.
  • The currency dipped below CAD1.3560, approaching the yearly low near CAD1.3540, with further support around CAD1.3500.
  • Momentum indicators suggest corrective forces could push the greenback higher toward the CAD1.3650 to CAD1.3680 region.

Key Points:

  • Canadian dollar strength remains tied to broader US dollar trends.
  • Labor market data highlights rising unemployment and weaker hiring.
  • Trade deal progress with the US is encouraging, supported by digital tax discussions.
  • Technical levels show support near CAD1.3500 and possible resistance around CAD1.3680.

China

Overview

Chinese authorities continue to manage the yuan’s appreciation carefully by adjusting the daily reference rate for the US dollar. While the dollar can move up to 2 percent from the official fix, trading platforms generally enforce this band tightly, rejecting prices that fall outside it. Since the US dollar peaked in April just above CNY7.35, Chinese officials have permitted a gradual decline to around CNY7.16, reflecting a controlled 2.6 percent strengthening of the yuan. This suggests policymakers aim to moderate the pace of appreciation to maintain export competitiveness and financial stability.

Looking ahead, China’s key scheduled data releases include the consumer and producer price indexes, which are due midweek. The persistence of producer price deflation points to over-investment in some sectors, while consumer price deflation has been shaped by falling food prices and oversupply in areas like automobiles. Despite a surge in aggregate lending of around 25 percent year-over-year through May, credit growth has yet to drive stronger overall economic activity, indicating continued structural challenges in domestic demand.

Economic Drivers

  • PBOC’s use of the daily reference rate to guide yuan appreciation gradually.
  • Deflation in producer prices reflecting over-investment in certain sectors.
  • Deflation in consumer prices tied to falling food costs and oversupply.
  • Aggregate lending growth failing to translate into broader economic expansion.

Data and Events

  1. 06 July & 07 July 2025: BRICS Summit.
  2. 09 July 2025: CPI.
  3. 09 July 2025: PPI.
  4. 09 July 2025: New Loans.

Price Action

  • The CNH7.15 level may act as support for the dollar, with potential movement back toward CNH7.1750 or CNH7.20.
  • Onshore yuan continues to trade within the offshore range of roughly CNY7.1550 to CNY7.19.

Key Points:

  • Authorities are carefully managing the yuan’s gradual appreciation.
  • Deflation signals structural imbalances in production and consumption.
  • Lending growth has yet to lift broader economic momentum.
  • Price action shows the yuan contained within a relatively tight trading band.

Europe

Overview

The euro has found support through portfolio rebalancing and shifts in interest rate differentials. Recently, Germany’s two-year yield spread to US rates narrowed significantly, dropping below 190 basis points for the first time in nearly three months. However, this discount quickly widened again following US labor data, closing the week around 205 basis points. Germany’s ten-year spread also tightened before rebounding to approximately 176 basis points, reflecting market sensitivity to changing global interest rate expectations.

The broader eurozone economy continues to grapple with weak momentum. After modest growth of 0.6 percent quarter-on-quarter in the first quarter, expectations for the second and third quarters point to stagnation. German factory orders recently fell, casting doubt on the upcoming industrial production report. Nonetheless, German industrial output has shown alternating monthly swings, and the pattern suggests a potential rebound in May after a decline in April. Italy has demonstrated stronger industrial production so far this year, rising nearly 2.9 percent in the first four months, while France and Germany will provide updated trade figures this week to further gauge economic strength.

Economic Drivers

  • Euro supported by portfolio adjustments and narrowing rate spreads against the US.
  • German yield spreads reacting sharply to US employment data.
  • Eurozone growth expected to stagnate in coming quarters.
  • Industrial output volatility in Germany with steadier growth in Italy.

Data and Events

  1. 07 July 2025: German Industrial Production.
  2. 07 July 2025: Sentix Investor Confidence.
  3. 07 July 2025: Retail Sales.
  4. 08 July 2025: German & French Trade Balance.
  5. 10 July 2025: Italian Industrial Production.
  6. 11 July 2025: German & French Final CPI.

Price Action

  • Euro’s initial retracement level sits near $1.1685, with the 50 percent retracement around $1.1640.
  • Momentum indicators look set to weaken in the coming days.
  • Resistance levels are seen around $1.19 and a more significant barrier near $1.20.

Key Points:

  • Euro benefits from portfolio flows and shifting rate spreads.
  • Eurozone growth remains fragile, with Q2 and Q3 forecasts flat.
  • Industrial production data will be crucial to track momentum.
  • Resistance seen near $1.19 with support at $1.1640 to $1.1685.

Japan

Overview

The yen remained the weakest among G10 currencies in the second quarter, depreciating roughly 4.1 percent against the US dollar. This weakness has been influenced by the Bank of Japan’s limited progress on policy normalization due to fragile economic growth and uncertainty around the effects of US tariffs. The traditional relationship between US Treasury yields and the yen has also become less predictable, with correlations weakening earlier in the year before recovering slightly in June. At the same time, the correlation between the yen and the broader Dollar Index has softened after peaking above 0.90 in May.

Japan’s domestic data has offered little support for the currency. Labor earnings have fallen consistently in real terms, with negative year-over-year figures every month so far this year. April real cash earnings were 2 percent lower from a year earlier, extending a multi-year trend of declining purchasing power. Meanwhile, the current account remains in surplus despite a persistent trade deficit, and producer price pressures have moderated after peaking earlier in the year. These developments underscore the Bank of Japan’s cautious approach as it weighs growth risks against gradual monetary policy adjustment.

Economic Drivers

  • Limited policy normalization by the Bank of Japan due to weak growth and tariff uncertainty.
  • Consistently negative real wage growth, limiting domestic demand recovery.
  • Current account surplus supported by investment income despite a trade deficit.
  • Cooling producer prices after earlier peaks, easing inflationary pressures.

Data and Events

  1. 07 July 2025: Average Cash Earnings.
  2. 08 July 2025: Current Account.
  3. 08 July 2025: Economy Watchers Sentiment.
  4. 09 July 2025: Prelim Machine Tool Orders.
  5. 10 July 2025: PPI.

Price Action

  • Dollar strength pushed to the 50 percent retracement target near JPY145.35 after jobs data.
  • Further resistance may be seen near JPY146.00 to JPY146.20.
  • Initial support stands around JPY144.00, with secondary support between JPY143.50 and JPY143.65.

Key Points:

  • Yen weakness driven by weak growth, tariffs, and limited BOJ tightening.
  • Real wages continue to contract, pressuring consumer spending.
  • Current account surplus persists despite a trade deficit.
  • Technical levels show resistance near JPY146.20 and support close to JPY144.00.

United Kingdom

Overview

The UK economy faces a potential shift from leading G7 growth in the first quarter to trailing its peers in the second. Political turbulence is adding to uncertainty, with the Starmer government navigating policy reversals and internal divisions after its landslide victory last year. While a cabinet reshuffle is often expected, it may be postponed until after the summer. Sterling’s strong performance in the second quarter, gaining over 6 percent, was mostly a reflection of broad US dollar weakness rather than domestic strength. The pound’s inverse correlation with the Dollar Index has been close to 0.88, a level rarely seen since before the pandemic.

Economic data continues to reveal fragility. UK GDP shrank by 0.3 percent in April, erasing gains from March and raising questions about growth momentum in the second quarter. Industrial production and services both contracted, while the trade deficit nearly doubled in April. Although the May GDP estimate is expected to show a modest 0.1 percent expansion, the broader picture suggests an economy struggling to maintain stability as political and global headwinds persist.

Economic Drivers

  • Sterling strength supported by US dollar weakness rather than domestic resilience.
  • Political friction within the Starmer government following policy reversals.
  • Weak second-quarter economic indicators after a strong first quarter.
  • Contraction across industrial production and services in April.

Data and Events

  1. 07 July 2025: Halifax HPI.
  2. 09 July 2025: BOE Financial Stability Report.
  3. 09 July 2025: FPC Meeting Minutes & Statement.
  4. 09 July 2025: 10-y Bond Auction.
  5. 10 July 2025: RICS House Price Balance.
  6. 11 July 2025: GDP.
  7. 11 July 2025: Goods Trade Balance.
  8. 11 July 2025: Industrial & Manufacturing Production.

Price Action

  • Sterling fell sharply from a multi-year high near $1.3790 to below $1.3565 in early July.
  • The 50 percent retracement around $1.3530 may act as support if the $1.3700 to $1.3710 zone holds.
  • A break under $1.3530 could expose the $1.3470 area as the next target.

Key Points:

  • UK growth momentum has weakened in Q2 after leading the G7 in Q1.
  • Sterling’s strength is driven by US dollar weakness rather than domestic fundamentals.
  • Political uncertainty within the Starmer government may postpone a cabinet reshuffle until after summer.
  • April GDP contracted by 0.3 percent, with only a slight 0.1 percent expansion forecast for May.
  • Technical levels show resistance near $1.3700 and possible support around $1.3530.

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