Walk This Way

US

USD is trading heavy near a three-year low. The US economy is moving in stagflationary direction, undermining USD. In May, headline PCE matched consensus at 2.3% y/y vs. 2.2% in April and core PCE ran hot at 2.7% (consensus: 2.6%) vs. 2.6% in April. Meanwhile, real personal consumption expenditure unexpectedly declined -0.3% m/m (consensus: 0%) after rising 0.1% in April, driven by a -0.8% plunge in spending on goods and flat spending on services.

The May PCE data aligns with the FOMC’s June economic projections, hinting at stagflation concerns. The 2025 median projections for PCE and core PCE inflation were revised 0.3pts higher to 3.0% and 3.1%, respectively, while real GDP growth forecast was trimmed 0.3pts to 1.4%.

Moreover, US protectionist trade policy is a downside risks to growth and upside risk to inflation. Yale’s non-partisan Budget Lab policy research center estimates the 2025 tariffs through June 16 would bring the overall US average effective tariff rate to 15.8% (up 12.7% year-to-date), the highest since 1936.

We expect the Trump administration to extend its July 9 deadline to strike trade deals. Only two trade agreements (with the UK and China) have been signed since the three-month pause on the reciprocal tariffs was announced April 9. Treasury Secretary Scott Bessent acknowledged the challenge of the timeline, stating “If we can ink 10 or 12 of the important 18 — there are another important 20 relationships — then I think we could have trade wrapped up by Labor Day [September 1]”

Canada and the US have agreed to resume trade negotiations with a view towards agreeing on a deal by July 21. On Friday, President Donald Trump said he was ending all trade discussions with Canada, in retaliation to Canada’s digital services tax (DST) which was due to start today. On Sunday, Canada announced the collection of the DST will be halted, and legislation will be brought forward to rescind the Digital Services Tax Act. USD/CAD retraced all of Friday’s overshoot.

Republican leaders are racing to have the One Big Beautiful Bill Act (OBBBA) bill on President Donald Trump’s desk by his proposed deadline of Friday. With the Senate still struggling to pass its version of the bill, we believe it will be very difficult to then get a compromise bill that can be approved by both the House and Senate by Friday. Of note, the CBO estimates that over the next ten years the current version of Senate bill would add $3.3 trln of budget deficits while the House bill would increase the deficit by $2.8 trln.

The ballooning US fiscal imbalance will continue to put upward pressure on the term premium and weigh on USD. The premium investors require for holding 10-year Treasuries (the term premium) rose in May as high as 0.9%, the highest since mid-2014, before stabilizing at 0.7% recently.

EUROZONE

EUR/USD is up above 1.1700. The ECB holds its annual forum in Sintra this week (Monday to Wednesday). The theme is “Adapting to change: macroeconomic shifts and policy responses.” ECB President Christine Lagarde kicks-off today with an introductory speech (8:00pm London). The highlight will be tomorrow’s policy panel with BOE Governor Andrew Bailey, President Lagarde, Fed Chair Jay Powell, BOJ Governor Kazuo Ueda, and Bank of Korea Governor Chang Yong Rhee.

Today, the ECB will announce the results of its strategy assessment (10:30am London). A press conference with President Lagarde and Chief Economist Philip Lane will follow-up (12:00pm London). Launched in March, the strategy assessment is an evaluation of the 2021 monetary policy strategy statement to see what’s working and what needs updating. The ECB is expected to reaffirm its symmetric 2% inflation target over the medium term.

Italy and Germany report their EU harmonized June CPI prints (10:00am & 1:00pm London, respectively). Both Italy and Germany CPI are expected to rise 0.1pts to 1.8% y/y and 2.2% y/y, respectively. Tomorrow, the Eurozone CPI data is due with headline projected at 2.0% y/y vs. 1.9% in May and core forecast at 2.3% vs. 2.3% in May.

Overall, Eurozone headline and core inflation are currently around the 2% target. However, services inflation (3.2% y/y in May) still has some distance to travel to make sure that inflation stabilizes at the target on a sustainable basis. Bottom line: the ECB is nearly done easing which is EUR supportive. The swaps market implies one 25bps rate cut over the next 12 months and the policy rate to bottom at 1.75%.

NEW ZEALAND

NZD/USD is nearing a breakout, trading just shy of the June 16 high at 0.6088. New Zealand’s ANZ business outlook survey firmed up in June. Business confidence increased 9.7 points to a 2-month high at 46.3 and expected own activity rose 6.1 points to a 2-month high at 40.9. However, reported past activity (the best GDP indicator) fell 3 points to 2.

The RBNZ easing cycle has likely come to a halt, underpinning NZD. Indeed, Governor Christian 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 implies 16% odds of a rate cut at the next July 9 meeting and 33bps of total easing over the next 12 months for the policy rate to bottom between 2.75-3.00%.

CHINA

USD/CNH is holding just above key support at 7.1500. China economic activity improves in June. The composite PMI rose 0.3 points to a three-month high at 50.7, reflecting modest gains in the manufacturing and services sectors. The manufacturing PMI printed at 49.7 (consensus: 49.6) vs. 49.5 in May while the non-manufacturing PMI was 50.5 (consensus: 50.3) vs. 50.3 in April. Bottom line: the recovery remains fragile, and we expect more stimulus measures in the second half of the year.