The combination of a loss of US jobs in July and softer inflation gauges, and an unexpected decline in July retail sales saw the derivatives market downgrade the chances that the three hawkish dissents last month will manage to convince their colleagues to hike rates at next month's FOMC meeting. The Fed funds futures finished last week with a little less than eight basis points of tightening next month discounted, down from 18 bp at the end of July. Market expectations may not be impacted much by the upcoming US data that features July industrial output and preliminary August PMI. The CPI and PPI remove most of the guesswork from the July PCE deflators, which are due a few hours before Fed Chair Warsh speaks at Jackson Hole on August 26 and the year-over-year headline pace is expected to have slipped to about 3.5% on the headline (from 3.7%) with the core rate steady at 3.3%.
While there is little doubt that China's movement into high-valued added production, like autos, chips, and robotics are changing trade patterns and challenging existing producers, a more potent threat is from the US, which is threatening to impose 50% tariffs on around $20 bln of Canadian goods as of Wednesday, August 19. The US threatens more tariffs when its investigations, such as for chronic "excess capacity", which will ostensibly hit US allies, not only Beijing. The continued disruption stemming from the Middle East war, with Iran seemingly going on the offensive, which the International Energy Agency assessed was the large disruption "in the history of the global oil market" exacerbates stagflationary pressures, especially in Europe, which is also being hard hit by the powerful heatwave. Meanwhile, since the Tokyo-Washington intervention at the end of July, officials have been unusually quiet, and the market has sold the yen in the past two weeks. Japanese investors took advantage of the yen's intervention-inspired upticks to step-up their purchases of foreign bonds and stocks, the most in two-year, and which appears to have largely recycled the amount of yen that the US Treasury bought.
U.S.
Drivers: The dollar continues to appear most sensitive to changes in short-term interest rates. The 30-day correlation of changes in the Dollar Index and the US two-year yield is near 0.60, its highest in nearly two months.
Data: After the July jobs reports and inflation gauges, the flurry of economic data in the coming week is somewhat less important. Housing starts and industrial production will feed into forecasts for Q3 GDP. Halfway through the quarter, and the median forecast in Bloomberg's survey is for 2.1% annualized growth. The Treasury's International Capital (TIC) report always draws interest. In the first five months of the year, foreign investors bought a net $483.3 bln of US stocks and bonds compared with $661.1 bln in the Jan-May 2025 period. Fed Chair Warsh is reducing the central bank's communication even before his taskforces have reached any conclusions. Look for the FOMC minutes, like in June, to be shorter and less revealing than previously was the case. It will be interesting to see 1) how close the three hawkish dissents were to winning over other FOMC members, and 2) if there was a discussion of reducing the number of FOMC meetings in a year as reported in the media.
Prices: This month, the Dollar Index has been bumping up against 100.00. It has not been above 100.10. After the unexpected decline in US July retail sales, the Dollar Index was sold to new lows for the week a little below 99.50. The low seen after the surprise loss of jobs in July was 99.40. Initial support is seen in the 99.20-30 area. A break could spur losses to 98.70, which DXY has not traded below since mid-May. Still, the momentum indicators have flatlined in oversold territory.
EMU
Drivers: The 30-day correlation of changes in the euro and the two-year US yield is near -0.60, the most extreme in about three weeks. The euro's 30-day correlation with changes in Germany's two-year yield is near -0.16. That is to say that a rising US rates are association with a weaker euro, which makes intuitive sense, but higher German two-year yield is also associated with a weaker euro. The correlation between the exchange rate and the two-year interest rate differential is an almost -0.52. It reached -0.60 in mid-July, the most robust in more than two decades.
Data: The week's highlight is the preliminary August PMI on August 21. Recall that in July the composite PMI reached a new high since last November at 52.0. The same day, the ECB releases its July survey of one- and three-year inflation expectations. Germany's August ZEW survey will be reported earlier in the week. In July, the assessment of the current situation remained somber at -77.6, a three-month high but still slightly weaker than the Q2 average. The expectations component has risen for three months through July to 26.3 compared with 45.8 at the end of last year and 58.3 on the eve of the Middle East war. The swaps market remains confident of an ECB rate hike in September (~85%).
Prices: The euro reached new highs for the week ahead of the weekend, $1.1585, slightly above the high seen at the end of the previous week after the unexpected loss of US jobs in July. A move above the $11615-30 area improves the technical outlook, but the momentum indicators are stretched, suggesting upside may be limited.
PRC
Drivers: The yuan is the strongest currency in Asia this year, rising about 3.65%. The yen is off about 1.5%. here is not a compelling reason to think that the changes in the yen impact the yuan. The broad direction of the dollar is more important. The 30-day correlation of changes in the Dollar Index and the offshore yuan is near 0.73, which is the most since late 2024.
Data: This is the week that China reports high-frequency real sectors data and new and used house prices. The data is August 17. Sequentially, retail sales look a little stronger, while industrial production, fixed asset investment, and property investment may have softened. Home prices continue to look weak. The banks set the loan prime rates on August 19 and will likely remain steady at 3.0% and 3.5% for the one-year and five-year rates, respectively.
Prices: This month, the dollar has held below CNH6.76 and above CNH6.74. With the broad dollar set back ahead of the weekend, the PBOC may struggle not to set the dollar's fix on Monday at a new low since February 2023. Still, we are cautious, seeing some signs that the officials may be seeking to moderate its appreciation, perhaps, ahead of the Trump-Xi meeting next month. The US has already announced new import restrictions and tariffs om China, while stepping up its push back against "transshipments", though the US Trade Representative have yet to give a precise definition (domestic content).
Japan
Drivers: The market continues to test the resolve of Japanese and US officials to put a floor under the yen. Contrary to conventional wisdom, the exchange rate is more sensitive to changes in US short-term yields than Japanese rates. The 100-day correlation of changes in the exchange rate and changes in the US two-year yield is near 0.65, near the highest since last November. The 100-day correlation of changes in the exchange rate and Japan’s two-year yield is de minimis around 0.02. The correlation has been mostly inverted this year but turned positive in late June.
Data: Japan will report its first official estimate of Q2 GDP on August 17. Growth is expected to have strengthened to 2.0% (annualized) after 1.8% in Q1 26, though consumer spending steady to weaker. On the other hand, capex appears to have recovered after it contracted by 0.7% in Q1. June industrial production, tertiary activity index, and core machine orders are due the next day. The July trade balance will be reported on August 20. There is a strong seasonal pattern for deterioration but note that the even stronger seasonal pattern of improvement was defied in June. Still, on a trend basis, Japan's trade imbalance is gradually improving. At the end of the week, the national July CPI is released. Investors have already been warned by the Tokyo CPI when it was released late last month of modest upward pressure on the national figures. Tokyo's headline measure rose to 2.0% from 1.7% and the core went to 1.9% from 1.6%. Comparable gains in the national CPI would put the headline and core near 1.9%. The preliminary August PMI is due shortly thereafter, but the markets tend not to react much to it. Still, recall that in July, the composite was 52.8. It finished last year at 51.1 and peaked in February at 53.9.
Prices: The dollar reached about JPY159.55 last week, its best level since the late July intervention. Officials have been remarkable silent. Many market participants sense that the JPY160 level is a possible trigger for officials and turned cautious as it was approached. Initial support is seen near previous resistance around JPY158.50, which it tested approached ahead of the weekend. It also corresponds with the (39.2%) retracement of the greenback's bounce from the intervention-inspired low near JPY156.70. The 200-day moving average is a little lower around JPY158.25. The momentum indicators look constructive, and Japanese investors responded to the yen's gains by aggressively buying foreign bonds and stocks.
UK
Drivers: The rolling 30-day correlation of changes in the sterling and the euro is near 0.76. The year's low in late July was near 0.65. The and the high in mid-June was above 0.90, the highest since November 2023. As we have noted the exchange rate remains more sensitive to changes in the US two-year yield (30-day correlation is near -0.42) than changes in the UK two-year yield (~0), though note there has been an inversion since early April, meaning that an increase is short-term UK rates is not associated with a firmer pound.
Data: It is a big week for UK data. June jobs data on Tuesday kicks off the reports. While average weekly earnings (three-month year-over-year) ticked up to 4.3% in May from 4.2% at the end of last year, the measure of regular pay in the private sector has not risen since the end of 2024. It has fallen by 0.1% a month through May this year after falling a little more than twice as fast last year. The number of payrolled employees fell by about 38.5k in H1 26 after falling by 33k in H2 25. The following day, the July CPI is due. In H1 26, UK's headline CPI rose at an annualized pace of 3.6%, down from 4.8% in H1 25. In June, the headline and core rates rose by 2.6% year-over-year, though services inflation was sticky at 3.6%. At the end of the week, the UK reports July retail sales, the government's finances (July) and sees the preliminary August PMI. UK retail sales (volume) were strong in H1 26, rising by an average of 0.6% a month, and rose by an average of 1.1% in May and June. On one hand, the UK's budget deficit in the first three months of the fiscal year was GBP57.6 bln, which was about GBP3.7 bln less than in the first quarter of the previous fiscal year, it was GBP2.7 bln more than the Office for Budget Responsibility forecast. This leaves little flexibility for the new government. Lastly, the UK's composite PMI decline in June and July. It was 51.9 in July, which was still better than any monthly reading last year.
Prices: Ahead of the weekend, sterling rose slightly above $1.3560, its best level since mid-May. The (61.8%) retracement of the decline from the year's high in late January (~$1.3870) is near $1.3590. While there is scope for additional near-term gains, the momentum indicators are stretched, injecting a note of caution for sterling bulls.
Canada
Drivers: Changes in US dollar's exchange rate against the Canadian dollar over the past 30-sessions have a correlation with changes in the Dollar Index is near 0.65 (this year's range is ~0.40-0.85). More robust than this is the exchange rate's correlation with the two-year interest rate differential, which is near 0.82. Meanwhile, the exchange rates correlation with oil prices (WTI), which had been positive since mid-March (i.e., a rising US dollar was associated with rising oil prices), it has turned negative (inverse) since around mid-July is now around -0.28. The greatest inversion was seen in February about two weeks before the Middle East war began (-0.45).
Data: There are two highlights this week. The first is the July CPI on August 17 and the second is the June retail sales report at the end of week. Canada's headline inflation rose at an annualized rate of 4.8% in H1 26 compared with 3.6% in H1 25. The year-over-year rate was 2.8% in June, but the core (1.8%) and underlying measures (median and trimmed core) are emphasized by the central bank and below 2%. The median forecast in Bloomberg's survey is for a 0.4% increase in July, which would see the year-over-year rate edge up to 2.9% from 2.8%. The core rates are expected to be little changed. The swaps market sees practically no chance of a hike at the September 2 meeting and has about 14.5 bp of tightening priced in before the end of the year (~58% of a 25 bp hike is discounted). Canadian retail sales have risen by an average of 0.8% a month in the first five months of the year, a dramatic improved from an average of -0.4% a month in the same year ago period. StatCan made a preliminary estimate of a 0.4% increase in June. Note that on August 19, unless a deal is struck, the US threatened to impose a 50% tariff on around $20 bln of Canadian imports, and not exception was granted for good complying with the USMCA.
Prices: The US dollar was sold through CAD1.39 ahead of the weekend, even before the disappointing US retail sales were reported. It is the lowest level since June 3. It surpassed the (50%) retracement of the rally from the May 1 low (~CAD1.3550), found slightly above CAD1.3885. The 200-day moving average is near CAD1.3850 and the next retracement (61.8%) is close to CAD1.3800. There are a few reasons for caution: the momentum indicators are stretched. The greenback has slipped through the lower Bollinger Band five times in the last six sessions and decline in the US two-year premium has steadied around 120 bp, a drop of more than 20 bp in the past three weeks.
Australia
Drivers: The Australian dollar is sensitive to the US dollar's broad direction. The 30-day correlation of changes in the Aussie and the Dollar Index is near -0.68. The correlation between the exchange rate and changes in the US two-year yield is near -0.60, while the correlation of the changes in the exchange rate and Australia's two-year yield is about 0.24. The exchange rate's 30-day correlation with changes in gold has fallen from near 0.90 on June 9 to around 0.48 now. The low for the year was recorded in late March slightly below 0.30.
Data: Australia's Q2 wage price index is expected to have matched the 0.8% rise in Q1 26, but the base effect will allow the year-over-year pace to tick down to 3.2% from 3.3%. The following day, August 20, Australia's July employment report will be published. Australia's labor market improved in H1 26. The economy grew an average of almost 27k jobs a month compared with about 10k average in H1 25. Of those jobs, an average of 14.7k were full-time posts in H1 26 compared with an average of 6.4k in H1 25. The unemployment rate stood at 4.4% in June, up from 4.3% in June 2025, while the participation rate was steady at 67.0%. The preliminary August PMI will be released before the weekend. Recall that in July, the composite PMI was 53.2. It was the first back-to-back increase since July-August 2025. The composite PMI ended 2025 at 51.0, pointing to economic resilience in the face of three hikes already delivered this year.
Prices: The Australian dollar drew near $0.7100 before the weekend, its best level in a little more than two months. It is knocking on the upper Bollinger Band, and momentum indicators are stretched. Still, there may be enough juice for a marginal new high. The (61.8%) retracement of the Australian dollar's losses the early May high (~$0.7280) is found slightly below $0.7110.
Mexico
Drivers: Over the past 30 sessions, the USD-MXN exchange rate has been more sensitive to changes in US two-year yields (30-day correlation is ~0.59) and Mexico's two-year yield (0.50), which is to say that higher Mexican rates are associated with a stronger US dollar than with the Dollar Index (~0.41). Note that the peso is also sensitive to the broader risk environment. Using the S&P 500 as a proxy, the rolling 30-day correlation is near -0.62. Yet most of all, the peso is correlated with JP Morgan's Emerging Market Currency Index (~-0.75).
Data: Mexico reports June retail sales on August 21. Retail sales have been weak this year. Through May, they have risen by an average of 0.1% a month. In the first five months of last year, retail sales rose by an average of 0.4% a month. Although the economy appears to have recovered in Q2 after it contracted by 0.6% (quarter-over-quarter) in Q1, consumption and government spending likely slower. Gross fixed investment may have contracted but at slower pace. Still, it would be the seventh consecutive quarter of contraction. Net exports may have been the driver of the recovery.
Prices: The US dollar was sold ahead of the weekend to a little below MXN16.98. This is the first time the greenback traded below MXN17.00 since the run-up to the July 2024 Mexican presidential election. In the 20 sessions since July 17, the US dollar has fallen in all but three sessions against the peso. The momentum indicators are stretched. Previous support in the MXN17.08-MXN17.15 area may not act as resistance. Last week, Latam currencies accounted for four of the time five performing emerging market currencies. The 0.85% gain of the Taiwanese dollar led the complex, followed closely by the Colombian peso. The Mexican peso rose a little more than 0.7% and the Argentine peso by slightly less than 0.7%. The Peruvian sol rounded out the top five with about a 0.4% gain. On the other hand, the Brazilian real was the weakest of the emerging market currencies, losing about 3%.
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