As the second half of 2026 begins, the greenback lacks momentum to extend its uptrend. The DXY Index could remain in its year-long consolidation, facing a downward correction.
Following last Thursday’s disappointing US nonfarm payrolls, the market expects the two-month decline in Brent crude prices from $120 to $72 per barrel to show up in next week’s June US CPI data, just it did in Europe last week. Meanwhile, today’s ISM Services Prices Paid index should fall to 67.5 in June from 71.3 in May, mirroring the drop in its Manufacturing counterpart to 73 from 82.1. Tomorrow’s New York Fed’s 1-year inflation expectations, which have already fallen with crude to 3.46% in May from 3.64% in April, should move closer to February’s 3%.
During his congressional testimony on monetary policy next week, Fed Chair Kevin Warsh will likely reiterate his remarks at the European Central Bank Sintra Forum on July 1 that inflation risks have eased even though inflation remains high. However, don’t expect Warsh to signal an interest rate bias, in terms of direction or timing. Warsh’s drive to end forward guidance has already reduced the number of post-FOMC public appearances, speeches, and interviews by Fed Presidents and Governors. Lawmakers from both parties are also likely to move beyond interest rates and cross-examine him on ethics, executive overreach, and the Fed’s independence.
The USD’s exceptionalism narrative has weakened. Following the hawkish June 17 FOMC meeting, the Atlanta Fed GDPNow model’s growth forecast has fallen sharply to 1.19% from 3.04%. The merchandise trade deficit widened by 27.4% MoM to $105.8bn in May, the largest shortfall since Liberation Day.
USD/JPY started July lower by 0.7% at 161.34, after rising 2.1% to 162.55 in June. The yen carry trade strategy was dented by last Thursday’s disappointing US payrolls data, which reduced conviction in a September Fed hike. Japan’s policymakers may have wised up to how macro traders have “gamed” their playbook. Instead of treating levels like 160 as intervention thresholds, the Ministry of Finance may stop issuing advance final warnings and step in to trigger liquidations of overleveraged net-short yen positions. Following the Bank of Japan’s rate hike to 1% on June 16, hawkish board member Naoki Tamura outlined a strategy a week later to raise rates sequentially, by 25 bps at intervals of a few months, to the estimated neutral level of 2%. If this is the case, the new landscape will place JPY bears in precarious positions: any downside surprises in US data that erode Fed-hike expectations could act as a tripwire for an ambush.
After bottoming at the year’s low of 0.5626 on June 26, NZD/USD recovered to 0.5711 ahead of the expected hike at the July 8 Reserve Bank of New Zealand meeting. To extend the recovery, the RBNZ needs to rule out market expectations of a dovish hike or a surprise hold. To reverse the NZD/USD’s decline from 0.60 to 0.5640 in June, the RBNZ needs to keep the door open for more hikes. The central bank could achieve this by backing the IMF’s recommendation in the July 1 Article IV consultation to return interest rates to neutral by the end of 2026. During a CNBC interview in February, RBNZ Governor Anna Breman said the neutral rate was between 2.25% and 4%, with a central anchor at 3%.
Quote of the Day
“Doing well with money has a little to do with how smart you are and a lot to do with how you behave.”
Morgan Housel
July 6 in history
The US Congress unanimously resolved to name the US currency the "dollar" and adopted decimal coinage in 1785.
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if the applicable assets fall within the definition of 'financial instruments' that are set out in Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.