It was easy to want to chase the USD higher following last week’s FOMC meeting. Nine out of the 18 Fed participants pencilled in at least one rate hike in 2026 due to sticky inflation above the 2% target. According to the dots, three officials projected one hike, five favoured two hikes, and one called for three hikes. Fed Governor Christopher Waller will likely be one of the hawks when he speaks on June 22. Between the March and June Summary of Economic Projections (SEP), Fed officials sharply raised their inflation outlook, boosting their 4Q26 headline PCE projection to 3.6% YoY from 2.7% and their Core PCE forecast to 3.3% from 2.7%.

On the other hand, there are reasons not to get too carried away about a new USD uptrend. The other nine out of 18 Fed participants did not pencil in a hike this year. Speaking on June 25, New York Fed President John Williams will likely reiterate that monetary policy is already restrictive and in the right place. The SEP’s new PCE inflation forecasts are below the latest actual readings, suggesting that the war-related rise in inflation is transitory. Consensus sees the PCE inflation release on June 25 rising to 4.1% YoY in May from 3.8% in April, mirroring the bounce in CPI inflation to 4.2% from 3.8%.



Brent crude oil prices retreated to USD 80 per barrel last week, back to the levels at the start of Operation Epic Fury on February 28. Brent peaked at slightly above $120 at the end of April after a two-month rise. Hence, we cannot rule out a further decline in average gasoline prices in the US following its retreat below USD 5 per gallon this month. In month-on-month terms, core PCE inflation did slow from 0.4% in February to 0.3% in March and 0.2% in April.

The US and Iran appear incentivized to keep diplomatic channels open to push through an agreement to reopen the Strait of Hormuz despite the military clashes between Israel and Lebanon. There has been debate over the true intent of the Memorandum of Understanding. One hypothesis argues that the MoU functions to pivot Tehran’s focus away from its nuclear programme towards national economic reconstruction. By unlocking frozen assets and offering a pathway for regulated oil exports, the deal incentivizes Iran to prioritize infrastructure and trade revival over funding regional proxies. However, critics reject the economic reconstruction narrative, labelling the MoU a dangerous policy of appeasement that provides an immediate financial lifeline to an adversarial regime.

It is also premature to conclude that Fed Chair Kevin Warsh, who did not submit a dot, is a hawk. His priority at his first FOMC as Chair was to slash forward guidance by significantly shortening the FOMC statement and establishing task forces to prevent the Fed from guiding market expectations. Although US President Donald Trump dismissed the Fed’s hawkish pause last week with a casual “Whatever”, he could break this uneasy truce if the Fed steers towards an actual hike in September or October, as the futures markets are pricing just ahead of the November midterm elections. The Republican Party will likely worry that voters view the Fed’s hawkish shift as rejecting Trump’s claim that he has lowered the cost of living.

At the European Central Bank Forum on Central Banking on July 1, Warsh will be in a panel discussion with ECB President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem. Following Warsh’s swearing-in on May 22, Lagarde warned that the Fed’s institutional independence still faced a direct threat from political interference.

The EU and the US may step up international pressure on China to address its undervalued currency. At the G7 Summit in France on June 17, German Chancellor Friedrich Merz publicly declared that China’s currency is undervalued by 20% to 30%. At the EU Leaders Summit on June 18-19, the European Commission received backing from member states to take a firmer stance on Chinese-subsidized goods that threaten European industries. This high-profile panel may highlight that the Fed’s recent shift is not an aggressive push to out-hawk its global peers, but rather an alignment with shared international stagflation risks.

China’s trade surplus with the EU widened by 15% YoY in 2025 to a record EUR360.6bn and expanded another 10% in the first four months of 2026. Chinese producers have shifted to hybrid vehicles to counter the EU tariffs on Chinese electric vehicles since 2024. EU manufacturers have also become dependent on Chinese-processed critical minerals after Beijing countered US tariffs by restricting rare earth exports in April 2025.

US Senators Elizabeth Warren (Democrat) and Rick Scott (Republican) sent a bipartisan letter on June 18, urging Treasury Secretary Scott Bessent to officially relabel China as a currency manipulator. China’s trade surplus reached a record high of USD 1.2 trillion in 2025, representing almost 70% of the global trade surplus. The Senators also urged the Treasury to directly address China’s currency practices in the next Foreign Exchange Report and to coordinate more with G7 allies toward a unified response that pressures China to allow market-driven appreciation and full transparency in its exchange rate practices.

However, pressuring China will be significantly harder than it appears, given the sharp internal divisions within Europe and the overriding geopolitical strategy of the Trump administration. EU member states are fundamentally divided over how to handle Beijing, with some EU nations actively seeking closer economic ties with China as a hedge against erratic and unpredictable US diplomacy. Bessent is unlikely to take a hardline stance or trigger aggressive penalties while President Trump pursues high-level personal diplomacy in his next three meetings with President Xi Jinping – Xi’s state visit to the US in September, the APEC Summit in China in November, and the G20 Summit in the US in December.

With the US Supreme Court and trade courts limiting Trump’s tariff leverage in trade talks, the administration will likely push for more CNY appreciation. However, global oil prices need to stay low(er) to help mitigate the selling pressure on Asia’s less resilient currencies that are highly dependent on imported energy and vulnerable to renewed Fed hike bets. Japan, South Korea, India, and Indonesia have already moved towards stabilisation measures, such as FX direct interventions, higher interest rates, strict oversight of currency transactions, investigations into market misconduct, and tighter capital outflow restrictions.

Overall, staying vigilant is essential, as the volatile macroeconomic, domestic political, and geopolitical crosscurrents of the second quarter cannot simply be extrapolated into the third quarter.

Quote of the Day
“I am not afraid of an army of lions led by a sheep; I am afraid of an army of sheep led by a lion.”
     Alexander the Great

June 22 in history
Pluto’s first moon, Charon, was discovered by accident in 1978, by American astronomer James Christy at the US Naval Observatory.