The dollar is trading softer as Middle East tensions ease. President Trump has backed off from an imminent attack on Israel in favor of negotiations (see below). Oil prices are lower on the day, equity markets are mixed, UST yields are higher, and gold is lower. DXY is trading lower near 98.595 and remains heavy despite the hawkish hold from the Fed (see below). The euro is trading higher near $1.1525 while sterling is trading higher near $1.3490. Elsewhere, USD/JPY is trading lower near 145.40 after May CPI ran hot (see below). While the dollar will see a modest haven bid from time to time, we believe the fundamental dollar downtrend remains intact. With recent data coming in soft, we expect markets to start pushing back harder against the Fed’s hawkish hold this week. Market repricing of Fed easing along with easing tensions with Iran would open up further dollar downside.
AMERICAS
The U.S. seems to be backing off from an imminent attack on Iran. President Trump said that “Based on the fact that there’s a substantial chance of negotiations that may or may not take place with Iran in the near future, I will make my decision whether or not to go [with US military involvement in the Israel-Iran conflict] within the next two weeks [around July 3].” In the meantime, foreign ministers from Britain, Germany and France will hold talks today with Iranian representatives in Geneva. Brent oil prices remain elevated but are below yesterday’s cycle peak near $79.
Markets are still digesting the Fed’s hawkish hold. Chair Powell was uncharacteristically hawkish in the press conference. He reiterated that the Fed is well positioned to wait for greater clarity before considering any adjustments to the policy stance. Powell warned “We expect a meaningful amount of inflation to arrive in the coming months.” Indeed, the 2025 projections for PCE and core PCE inflation were revised materially higher. Powell spent much of his time on tariffs, noting while it may take some time, they are likely to boost prices. Powell said he is starting to see some effects and expects more as firms are expected to pass on the costs. He also noted near-term inflation expectations have moved up recently. Powell stressed that the size, amount, and duration of the tariffs are highly uncertain.
With regards to the real economy, Powell sounded upbeat. He noted that labor market conditions remain solid and that the economy appears to be growing 1.5-2.0%. Powell did acknowledge that there is some cooling in the job market but nothing concerning. Indeed, he said that the labor market “is not crying out” for a rate cut. With regards to policy, Powell said the Fed will likely get to a place where rate cuts are appropriate. However, he said that the Fed wants to see some tariff effects on inflation before making any policy judgments. Powell said there was strong support for the decision to hold rates but added that there was a healthy diversity of view on the FOMC.
Updated Dot Plots and macro forecasts were released. The Dot Plots were largely unchanged, with two cuts still seen in 2025, one cut (down from two in March) seen in 2026, and one cut still seen in 2017. However, the distribution of dots reveals a more cautious tone, with a growing number of officials (7 vs. 4 in March) now projecting no rate cuts this year. Inflation and unemployment forecasts were nudged higher, while growth forecasts were nudged lower. The key takeaway is that it seems that despite little or no tariff pass-through to inflation, the Fed is not inclined to cut rates. The market is pricing in around 10% odds of a July cut, rising to 66% in September and fully priced in for October.
Canada highlight will be April retail sales data. Statistics Canada advance estimate indicates retail sales increased 0.5% m/m vs. 0.8% in March. As in March, higher sales in April will likely be driven by an increase in motor vehicle sales in anticipation of higher import duties, as sales ex-autos are expected at -0.2% m/m vs. -0.7% in March. The swaps market sees 25% odds of a 25 bp cut in July, which becomes fully priced in by Q4. No more cuts are priced in after that and so the policy rate is seen bottoming at 2.50%.
The Canadian government announced a series of measures yesterday to protect steel and aluminum producers and workers. One of the measures include doubling the tariffs on US steel and aluminum to 50% on July 21 if no trade deal is reached by then. Canada is by far the top supplier of steel and aluminum to the US. Still, Canada’s steel and aluminum sector is small and accounts for about 0.2% of total GDP.
EUROPE/MIDDLE EAST/AFRICA
Bank of England kept rates steady at 4.25%, as expected. The bank reiterated its guidance for “a gradual and careful approach” to further rate cuts. However, the MPC vote split was a tad more dovish than anticipated. The MPC voted by a majority of 6-3 to keep rates on hold vs. 7-2 expected. Taylor, Dhingra, and Ramsden preferred to cut rates 25 bp. The statement also struck a cautious tone. The BOE noted that “Underlying UK GDP growth appears to have remained weak, and the labor market has continued to loosen, leading to clearer signs that a margin of slack has opened up over time.” Updated macro forecasts will come at the August 7 meeting, when there are currently around 80% odds of a cut. Looking ahead, the swaps market sees 75 bp of total easing over the next 12 months.
U.K. May retail sales plunged, supporting the case for a cut at the next meeting August 7. Retail sales including auto fuel fell -2.7% m/m vs. -0.5% expected and a revised 1.3% (was 1.2%) in April, while sales excluding auto fuel fell -2.8% m/m vs. -0.7% expected and a revised 1.4% (was 1.3%) in April. Sales volumes fell across all sectors, the largest fall being within food stores.
Swiss National Bank cut rates 25 bp to 0%, as expected. The SNB’s benign inflation forecasts leave room for more easing. Indeed, President Schlegel said the SNB is addressing “lower inflationary pressure” and stressed that the bank “will continue to monitor the situation closely and adjust our monetary policy if necessary.” He acknowledged that the cut brings rates “to the verge of negative territory” and added that “we are also aware that negative interest rates do have undesirable side-effects and present challenges for many economic agents.” That said, the swaps market is pricing in nearly 50 bp of easing over the next 12 months that would see the policy rate bottom around -0.50%. We believe that for now, CHF safe haven status outweighs the drag from the likelihood of negative rates.
Norges Bank unexpectedly cut rates 25 bp to 4.25%. No change was expected, with the swaps market pricing in just 7% odds of a cut. The decision was unanimous as the Norges Bank also flagged that “the policy rate will be reduced further in the course of 2025” as “the inflation outlook for the coming year indicates lower inflation than previously expected.” The bank’s new policy rate path implies one 25 bp cut to 4.00% by year-end (vs. 4.25% previously) and the policy rate to bottom around 3.00% by end-2028 (little changed from the previous forecast in March). The swaps market is pricing in 50 bp of total easing over the next 12 months.
ASIA
Japan May national CPI ran a little hot. Headline came in as expected and fell a tick to 3.5% y/y, while core (ex-fresh food) came in a tick higher than expected at 3.7% vs. 3.5% in April and core ex energy came in a tick higher than expected at 3.3% y/y vs. 3.0% in April. Core is the highest since January 2023 and moves further above the 2% target. Nonetheless, the BOJ will not be rushing to resume raising rates CPI ex-food and energy printed at 1.6% y/y for a third consecutive month. The swaps market still sees only 25 bp of tightening over the next 12 months and so the cautious normalization cycle is an ongoing headwind for JPY. The minutes of the April 30-May 1 meeting offered limited fresh insights, reflecting views formed ahead of this week’s policy decision to hold rates.
Australia May jobs report was soft. The economy unexpectedly lost -2.5k jobs vs. 21.2k expected and a revised 87.6k (was 89.0k) in April. The details were not that bad, however. Full-time jobs increased 38.7k vs. a revised 58.6k (was 59.5k) in April while part-time jobs fell -41.1k vs. a revised 29k (was 29.5k) in April. The unemployment rate was unchanged at 4.1% for a fifth consecutive month and is tracking below the RBA’s June 4.2% projection. Leading indicators point to a weaker labor market and so the RBA has room to deliver more rate cuts. The market sees nearly 85% odds of a 25 bp cut at the next meeting July 8 and nearly 100 bp of total easing over the next 12 months.
New Zealand reported solid Q1 GDP data. Real GDP growth came in a tick higher than expected at 0.8% q/q vs. a revised 0.5% (was 0.7%) in Q4, while the y/y rate came in a tick higher than expected at -0.7% vs. a revised -1.3% (was -1.1%) in Q4. Growth was driven by business services and manufacturing. The improvement in New Zealand economic activity supports the RBNZ’s stance that the easing cycle is on hold. Governor Hawkesby stressed recently that “when we next meet in July a further cut in the OCR is not a done deal. We’re really more in a phase where we are taking considered steps, data dependent.” The swaps market sees less than 20% odds of a rate cut at the next meeting July 9 and 25 bp of total easing over the next 12 months that would see the policy rate bottom at 3.00%.
