The week ahead is important. Seven G10 central banks meet. Even though Bank of Japan Governor Ueda has been hospitalized and will not attend the central bank meeting, it is only central bank expected to hike. Still, the FOMC meeting is historic, even though there is practically no chance of a change in policy. Kevin Warsh chairs his first FOMC meeting and a new Summary of Economic Projections will be published. A new era is at hand, and the full implications are not fully clear yet. In the UK, while the Bank of England still seems to be several months away from a change in monetary policy, the byelection in Makerfield may set the stage for a proper challenge to Prime Minister Starmer.
Risk appetites continue to appear sensitive to developments in the Middle East. After threatening a new round of intense bombing of Iran, the US relented and suggested an agreement was near. Risk was bought, lifting stocks and bonds and foreign currencies against the dollar in the North American afternoon on June 11. However, the lack of further progress and unnamed officials were quoted on the newswires suggesting an agreement may be struck on the outskirts of the G7 heads of state summit in France on June 15-17. Polymarket participants seem less sanguine and have a 17% chance that the Strait of Hormuz is re-opened by the end of June and 40% by the end of July.
U.S.
Drivers: The single most important driver of the dollar is US interest rates. The correlation is a little stronger at the short-end of the curve (December Fed funds and the two-year yield) than changes in the 10-year note yield. The 30-day correlation of changes in the Dollar Index and two-year note yield is near the highest in about ten years (~0.77) while the correlation with the December Fed funds futures is near a two-year high (~0.76).
Data: With the May employment and CPI in hand, attention would turn to the real sector this week with industrial output, retail sales, and housing starts on tap. However, the most important event is the FOMC meeting, which Warsh will chair for the first time and hold a press conference. There will be a new Summary of Economic Projections. The Bernanke, Yellen, Powell era at the Fed is over. Warsh is from a different school of thought, and his appoint of a couple of advisers, including the author of the Agenda 2025 chapter on the Fed, underscores that observation. In addition to changes at the Federal Reserve itself, which may include communication and inflation targets, we suspect there is a reasonably good case for a new Treasury-Fed accord and the revaluation of gold, which is carried on the US books at $42.22 an ounce.
Prices: The Dollar Index has been trending higher since early May. The trendline connecting May's lows begins the new week near 99.50 and near 99.75 at the end of the week. The momentum indicators look poised to turn lower. The 20-day moving average, which DXY has not closed below since May 13 is near 99.45.
EMU
Drivers: It seems intuitive that the euro would be sensitive to changes in US rates. The rolling 30-day correlation between changes in the two-year US yield and the euro is near -0.84, the most since 2003. What is less intuitive is that changes in the euro are also inversely correlated with changes in the Germany's two-year yield. It reached -0.65, in early June, the most extreme since Q1 2020. Theory suggests the rate differential should be more important, and while we find that exchange rate often broadly tracks the two-year US German interest rate differential, the 30- and 60-day correlations are statistically insignificant.
Data: The ECB's rate hike last week, and given the other central bank meetings this week, the eurozone data may pose little more than headline rise. The eurozone data includes industrial production, external balances, and construction output. Germany's June ZEW investor survey is due on June 16. Expectations in May improved (for the first time since January), while the assessment of the current situation deteriorated for the second consecutive month to stand at a new low for the year. Note that Sweden's Riksbank meets on June 17 and the Swiss National Bank and Norway's Norges Bank meet the following day. All three will most likely stand pat.
Prices: Follow-through selling after the June 5 slide, spurred by the US jobs report, was limited to $1.15, which was tested last Monday and Thursday. The euro peaked last Thursday and Friday near $1.1590, encouraged by hopes of a lasting ceasefire in the Middle East, which corresponds to about the halfway mark of the sell-off since the May 29 high near $1.1685. The 20-day moving average also is near $1.1600. The momentum indicators look set to turn higher. The $1.1640-55 area may offer resistance ahead of the end of May high.
PRC
Drivers: Beijing’s encouragement of gradual yuan appreciation through the setting of the dollar's daily reference rate is like oxygen. At the same time, the dollar's broad movement also has been conducive. Changes in the Dollar Index and the greenback against the offshore yuan rolling 60-day correlation rose above 0.80 for the first time in a decade in late May and is now around 0.76.
Data: China reports real sector data and house prices on June 16. The Chinese economy has lost some momentum. Retail sales in May are projected to have declined on a year-over-year basis for the first since the end of 2022. Industrial output may have increased by around 4.3% year-over-year. In May 2025, it rose 5.8% year-over-year. Meanwhile, house prices still do not appear to have reached a floor, and fixed asset investment contraction is deepening.
Prices: Ahead of the weekend, the PBOC set the dollar's reference rate at a new three-year low (CNY6.8109). Since the end of last September, when the PBOC campaign began the dollar's fix has risen on a weekly basis only three times (in 35 weeks). The cumulative move has been modest (~4.2%). Still, only a handful of emerging market currencies, (mostly Latam, Hungarian forint, Russian ruble, and South African rand) have outperformed it. It means that yuan is rising on a trade weighted basis alongside the rising trade surplus. The dollar made a new low for the week ahead of the weekend near CNH6.7590, just above the three-year low set earlier this month (~CNH6.7580). The next important technical target may be around CNH6.70.
Japan
Drivers: The broad direction of the dollar appears to be the one of the most important influences on the dollar-yen exchange rate, despite the weakening correlation. The rolling 30-day correlation of changes is nearly 0.60 correlated, down from about 0.85 in late May, and now is near the lowest in three months. The correlation of changes in the exchange rate and US rates is around 0.62 (two-year yield) and 0.60 (10-year yield). The dollar tends to rise when Japanese yields increase too, but the correlations over the past 30- and 60-days are below 0.1 (for the 10-year JGB yield for both tenors) and 0.15-0.20 (for two-year JGB yield). We are not convinced that a 25 bp hike will change the exchange rate dynamics. However, it might make the US more supportive, like it was in January, of Japanese official efforts to support the currency, rather than the silence that greeted the recent material intervention.
Data: The highlight of the week is the Bank of Japan meeting that concludes on June 16. The swaps market has 25 bp nearly fully discounted. The market also is discounting about an 80% chance of another hike before year end. Japan's May CPI is due a couple of days later, but the Tokyo CPI gives good insight. Recall that Tokyo's May CPI eased to 1.4% from 1.5%, and the core measure, which excludes fresh food slipped to 1.3% from 1.5%. The measure that excludes fresh food and energy moderated to 1.6% from 1.9%. The core rate, which the BOJ targets, has been below 2% for three months through April. Ironically, with US CPI running more than twice as high as Japan's, and growth considerably stronger (2.6% year-over-year in Q1 vs. 0.4% year-over-year in Japan), the US administration wants Japan's central bank to raise rate and for the Federal Reserve to cut them. Japan also reports May trade figures. By most reckoning, the yen is terribly undervalued, yet it continues to record trade deficits. It is swinging toward a surplus. In the first four months of the year, the trade deficit was about JPY200 bln. The deficit was about JPY1.91 trillion in the same period in 2025. Japan has reported a small surplus in five of the past six months.
Prices: The dollar settled above the JPY160 threshold for the second consecutive week. The greenback appreciated in the previous four weeks. In the three weeks before the late April intervention, the dollar had fallen. It reached almost JPY160.60 last week, its best level since poking above JPY160.70 briefly at the end of April. The momentum indicators are turning lower. A break of last Thursday's low (~JPY159.60), which also is around where the 20-day moving average is found, may be the first indication a top may be forming.
UK
Drivers: The 100-day correlation of changes in sterling and the euro (~0.88) is slightly higher than the correlation between the Swiss franc and euro (0.86). Changes in sterling are inversely correlated (30 sessions) with changes in the US two-year yield by the most in more than a decade (~-0.75). Sterling also is inversely correlated with changes in the UK two-year yield (-0.52, the lower end of a four-year range.
Data: Ahead of the conclusion of the Bank of England meeting on June 18, the UK reports May CPI and April/May labor market update. In the first four months of the year, UK's CPI has risen at an annualized rate of almost 4%. The UK's 10-year breakeven (the difference between the inflation protected security yield and the conventional yield) has risen from a little below 2.95% at the end of last year to nearly 3.65% in mid-May and now is near 3.28%. The UK's unemployment rate has risen from 4.4% at the beginning of last year to 5.2% in December 2025 and January 2026 before pulling back to 4.9% in February and was 5% in March. Private sector earnings growth (three-month average, year-over-year) has slowed to 3% in March 2026 from around 6% at the start of 2025. The swaps market recognizes there is little chance of a change in policy from the BOE now. The swaps market has about 9 bp of tightening discounted for next month's meeting or about 36% of a 25 bp hike. A hike is fully discounted at the November BOE meeting and about 12.5 bp of another hike in December is priced in before the end of the year. Meanwhile, all eyes will be on the Makerfield byelection on June 18, where a victory for Manchester Mayor Burnham will give him standing to challenge Prime Minister Starmer. Defense Secretary Healey resigned last week in a dispute over military spending. An ally of Starmer's, Healey's resignation is another blow to the prime minister.
Prices: After posting an ostensibly bearish outside down day after the US employment report on June 5, follow-through sterling selling was limited to about a quarter-of-a-cent at the start of last week. Sterling found support ahead of last month's low (~$1.3300). It recovered to almost $1.3435 on June 11 amid optimism about the Middle East. The momentum indicators have stabilized but have not turned higher. Sterling appears to be near the middle of a one-month two-cent trading range, $1.33-$1.35.
Canada
Drivers: Among various financial variable, the changes in the US dollar against the Canadian dollar had been the most correlated with the changes in the Dollar Index. The rolling 30-day correlation is around 0.70. The high for the year was in early March, near 0.85. It has now fallen to a new low since early January, around 0.47. The exchange rate is correlated with the changes in the US two-year yield. It peaked near 0.55 in mid-May, the highest since last October, and now it is near 0.37. The correlation was mostly inverse last November-December and again from early February 2026 to early March. Since mid-March, higher Canadian two-year rates have coincided with a stronger US dollar against the Canadian dollar. The 30-day correlation is a little above 0.35, the highest this year. It was mostly inversely correlated from last November through mid-March.
Data: As widely anticipated, the Bank of Canada left policy steady last week, with its overnight target rate at 2.25%. The policy dilemma that officials noted of the supply shock emanating from the Middle East war amidst economic sluggishness is understood to keep the central bank on the sidelines in the coming month. A quarter-point hike at the end of year is largely priced into the swaps curve. This week's high-frequency data, which includes May housing starts, existing home sales, and April portfolio flows and retails sales do not have the heft to move the needle.
Prices: Want to see a one-way market? Look at the Canadian dollar. Since the start of May, there have been 31 sessions through the end of last week. The Canadian dollar has weakened in 24 of the sessions, and five of the past six weeks. The greenback reached nearly CAD1.4025 last week, its best level since last November. The momentum indicators are stretched but do not stand in the way of a new high, but last November highs (~CAD1.4130-40) seem a bridge too far. Initial support maybe in the CAD1.3900-30 area.
Australia
Drivers: Over the past 30 sessions, changes in the Australian dollar's exchange rate are slightly more inversely correlated with changes in the US two-year yield (~-0.85), than the Dollar Index (~-0.77). Changes in the two-year US yield is more than twice the correlation with Australia's two-year yield (~0.12). The Aussie's rolling 30-day correlation with gold prices edged a bit higher to almost 0.87 in recent days, the highest in more than a decade. The 60-day correlation peaked in February, a little above 0.70, a two-year high, and is near there now.
Data: In an otherwise quiet week for high-frequency Australia data, the central bank meeting on June 16 is the highlight. The RBA has hiked its cash rate target by 75 bp this year in three steps to 4.35%. Governor Bullock has recognized that the tightening of policy is already having the desired impact. The Reserve Bank of Australia's mini-tightening cycle may be over. It followed a three-step easing cycle in 2025. The swap and futures market do not have another hike fully discounted.
Prices: The Australian dollar's losses after the June 5 US jobs data were extended from a little below $0.7040 to about $0.6980 last week. However, the risk-on, drop in oil prices and lower US rates helped the Aussie post a potential key upside reversal on June 11. The Aussie made a new two-month low and then recovered to settle above the previous day's high. It consolidated between about $0.7020 and $0.7055 ahead of the weekend. The neckline of the potential head and shoulders pattern is ~$0.7080-$0.7100 and it is not unusual to retest the neckline after a break of it. Momentum indicators are extended but have not turned higher. A break of the $0.6980 area could target $0.6940 next.
Mexico
Drivers: Two factors seem to have the most influence on the Mexican peso's exchange rate against the dollar now. The first is changes in the US two-year yield. The 30-day correlation is near 0.80, the highest in more than a decade. The 60-day correlation is around 0.55, the highest since late 2022. The other factor is the risk environment, for which we use the S&P 500 as a proxy. Over the past 30 sessions, the inverse correlation of change in the US dollar-peso exchange rate and the S&P 500 is near -0.76. It has rarely been more extreme than -0.80 in the past 10 years. The 60-day correlation is nearly identical with the 30-day, but it is the most extreme since 2012.
Data: There are no market-moving economic reports from Mexico in the coming days. Brazil's central bank meet on June 17, and economists polled by Bloomberg are more confident of a rate cut, which would be the second in the cycle than is the swaps market, which has about eight basis points of easing discounted.
Prices: Optimism about the war in the Middle East and the risk on spurred a 1% gain for the peso on June 11, the largest single day advance since early April. The peso has a five-day rally coming into the new week. The dollar pushed briefly above MXN17.50 on June 5 after the US jobs report and reached MXN17.1770 before the weekend, its lowest level in about a month. Last month's low was closer to MXN17.16 and the April low was about MXN17.1275. A two-year low was recorded in February near MXN17.0865.
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