The better-than-expected US jobs report on July 3 started the USD’s recovery this month by dashing expectations of an earlier US rate cut in July. As of July 14, the DXY Index has appreciated by 1.2% to 98.1 this month following its worst half-yearly plunge of more than 10% since 1973. A similar upside surprise in CPI could extend the DXY’s recovery by affirming Fed Chair Jerome Powell’s view that tariffs would lift inflation in the coming months. His case is reinforced by Trump’s latest threat to impose higher reciprocal tariffs on August 1 for countries that fail to strike trade deals with the US.
According to median expectations, headline and core inflation are expected to increase by 0.3% MoM in June, a significantly faster pace to May’s 0.1%. Since the end of June, the futures market has reduced the odds of a 25 bps cut at the September FOMC meeting to 60% from 90%. However, US President Donald Trump’s repeated attacks on Powell also appeared to have dulled the DXY’s ability to rally meaningfully on diminished rate cut expectations.
However, we do not expect currencies to react to any US CPI surprise in the same way they did to the July 3 jobs report. It is better to understand how the dynamics have changed for some currencies. For example, GBP turned from the most resilient on July 3 to the second worst performer because of two consecutive negative GDP growth prints in April-May, increasing rate cut expectations at the Bank of England meeting on August 7. AUD was the most resilient currency this month following the Reserve Bank of Australia’s surprise decision not to rush into a rate cut at its July 8 meeting and to wait for the 2Q25 CPI inflation report on July 30.
The JPY continued to underperform as markets priced in the risk of the ruling LDP-Komeito coalition losing its majority in the July 20 Upper House elections. Such an outcome could add to JGB volatility amid expectations for more expansionary fiscal policy and political resistance to further interest rate normalization by the Bank of Japan amid difficult trade talks with the US for concessionary tariff rates. Hence, it should not be a surprise that the CHF has enhanced its safe appeal in recent weeks, partly filling the gap left by the JPY’s underperformance.
Quote of the Day
”Pain makes man think. Thought makes man wise. Wisdom makes life endurable.”
John Patrick
July 15 in history
In 1941, Howard Florey and Norman Heatley presented freeze-dried mold cultures of penicillin.
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