US
The bounce in crude prices is losing traction. Markets are treating renewed US-Iran strikes as another round of managed escalation with technical talks between the two sides continuing. President Donald Trump even praised Iran's “gesture of goodwill” after Iran released a US citizen detained since December 2024. Trump is set to address the nation today at 9:00pm ET.
USD steadied after sliding to near a one-month low yesterday. Cooler than expected June PPI inflation reinforced the moderation in June CPI inflation, weighing on the Fed funds futures curve and undermining USD.
We think the dollar’s decline is overdone. US economic outperformance, the Fed's resolve to get inflation back to 2% anchoring hawkish pricing, and strong foreign demand for US long term securities should keep USD supported.
New York Fed President John Williams and Fed Governor Lisa Cook delivered speeches yesterday that offered fresh insights into how policymakers are assessing the inflation outlook. The key takeaway is that the FOMC is united on holding rates for now, but less united on how durable the inflation threat is, implying policy rate expectations are likely to remain particularly sensitive to incoming inflation data.
Williams argued that “inflation has peaked and should edge down in coming quarters” reflecting fading tariff effects, easing shelter and energy inflation, improving AI supply, subdued wage pressure and anchored inflation expectations. In contrast, Cook believes “the risks continue to be strongly weighted toward higher inflation” citing persistent AI-related capital expenditures and supply shocks from tariffs and the Middle East conflict.
The July Fed Beige book also pointed to a mixed inflation outlook. Contacts in some Districts expect “inflation to continue at its current pace, while contacts in others expected inflation to slow, in part due to falling fuel prices.”
June retail sales report is up next (1:30pm London, 8:30am New York). Total retail sales are expected at 0.2% m/m vs. 0.9% in May as a World Cup-related spending boost offsets lower receipts at gas stations. The more policy relevant control-group sales - which exclude cars, gas, food services, and building materials – is seen rising 0.4% m/m vs. 0.7% in May, consistent with resilient consumer spending activity.
UK
GBP is consolidating yesterday’s broad-based gains driven by investors relief that former frontrunner Ed Miliband is unlikely to become the next Chancellor of the Exchequer. Miliband is seen as the least market-friendly choice.
UK May GDP beat expectations, but the details underwhelm. Real GDP unexpectedly rose 0.1% m/m in May (consensus: 0%) vs. -0.1% in April, tracking the Bank of England’s (BOE) baseline Q2 forecast of +0.1% q/q.
The growth in May was because of a 0.3% rise in services and was partially offset by falls of -0.5% in production, and -0.8% in construction. Disappointingly, the strength in services activity was largely driven by a single subsector - professional, scientific and technical activities – which contributed 0.16ppt to real GDP growth.
The swaps curve continues to fully price in a 25bps BOE rate rise to 4.00% in November and a total of 50bps of tightening in the next twelve months because inflation is proving sticky. BOE rate hikes in a sluggish growth and high inflation environment is not bullish GBP. Moreover, the prospect of higher spending and borrowing under incoming Prime Minister Andy Burnham argues against a sustained rally in GBP. GBP/USD next resistance is offered at 1.3600.
SOUTH KOREA
KRW is outperforming across the board underpinned by the Bank of Korea (BOK) hawkish hike and fading portfolio rebalancing outflows.
Bank of Korea (BOK) delivered a hawkish hike. BOK raised the policy rate 25bps to 2.75% after keeping rates on hold the past year. A rate hike was widely anticipated and supported by all seven Monetary Policy Board members. BOK noted that economic growth has strengthened, and inflation is expected to remain above the 2% target level “for a considerable time”.
Going forward, BOK stressed “that it will be necessary to continue a policy stance consistent with further rate hikes.” That’s reasonable considering that South Korea real GDP growth (3.8% y/y in Q1) and core inflation (2.5% y/y in June) are expected to exceed the BOK’s 2026 projection of 2.6% and 2.4%, respectively.
In parallel, the KOSPI index plunged as much as 7.6% today, wiping out the previous session’s gains and nearing its lowest level in more than two months amid the AI-led semiconductor selloff. The KOSPI’s correction following an extended period of outperformance reduces the need for global investors to trim Korean equity exposure back to benchmark, removing a key source of KRW selling pressure.
The outlook for KRW is encouraging. The currency is significantly undervalued (11% undervalued based on deviation from real effective exchange rate trend), the BOK has started to tighten, and the South Korean government is taking meaningful steps to internationalize the won.
CANADA
USD/CAD is consolidating this week’s losses triggered by the benign US June CPI and PPI inflation reports. As was widely expected, the Bank of Canada (BOC) left the policy rate on hold at 2.25% for a sixth straight meeting yesterday.
The updated projections suggest the BOC is in no rush to start raising rates. Core inflation is seen averaging 2% y/y over Q3, and real GDP growth is projected to cool from an annualized pace of 2.5% q/q in Q2 to 1.5% in Q3. Bottom line: there is room for BOC rate hikes bets (50bps in the next twelve months) to adjust lower against CAD as the Canadian economy remains in excess supply.
Notably, the BOC may have taken a page from Fed Chair Kevin Warsh’s playbook and stepped back from forward guidance. The BOC dropped its two-way policy optionality first introduced in April that new US trade restrictions on Canada would argue for cuts, but persistently high energy prices could warrant “consecutive increases in the policy rate.”
