Dollar Pressured Ahead of Soft CPI After Jobs Miss

The dollar opens the week under pressure after July's employment report delivered the first net loss of jobs since February. The inflation data due in the coming days is forecast to run soft, and the Fed's September meeting remains a genuine question rather than a settled bet.

Futures pricing cut the odds of a hike next month to about 44% from roughly 72% a week ago. The three-month moving average of job gains stands at 20k, down from 142k in May. The drop in the unemployment rate to 4.1% from 4.2% traces to the participation rate, which at 61.4% matches the lowest since the pandemic.

CPI and PPI Look Set to Run Soft

The July CPI and PPI are the week's data highlights, and the forecast profile is benign. June delivered about as soft an inflation report as exists: headline CPI fell 0.4% and the core was flat. The median forecast in Bloomberg's survey calls for a 0.1% increase in the headline rate and 0.2% in the core. Base effects point to the year-over-year headline rate slipping to 3.4% from 3.5% and the core easing to 2.5% from 2.6%, depending on rounding. Producer prices are expected up 0.2% headline and 0.3% core. The annual pace would moderate to about 4.9% from 5.5%, with the core easing to 4.2% from 4.7%.

The FOMC does not meet until September 16, and the committee will have another jobs report plus August CPI and PPI in hand by then. The July employment report raises the bar to a September hike.

Retail sales, flattered by higher prices, averaged a 0.8% monthly increase in the first half versus 0.1% in H1 25. A core measure that strips out autos, gasoline, food services and building materials, used in some GDP models, is expected to slow to 0.3% from 0.5%. The comparative averages are 0.7% this year and 0.2% in H1 25. The federal deficit through the first nine months of the fiscal year stands at a cumulative $1.37 trillion, about $30 billion more than a year ago and $100 billion more than the first nine months of the previous fiscal year. The Congressional Budget Office projects the deficit will reach $1.92 trillion this year, 5.8% of GDP, which implies an average shortfall of about $183.3 billion a month through the final three months of the fiscal year. In the last three months of FY25, the shortfall averaged $146 billion a month.

RBA and Norges Bank Expected to Hold

The Reserve Bank of Australia meets Tuesday and the Norges Bank in the coming days, both expected to stand pat. The derivatives market gives a Norwegian hike before year-end more weight than an RBA move. On the 4.35% cash rate target, futures price practically no chance of a change at this meeting. The odds of a hike before year-end stand near 60%, up from about 46% at the end of July. June data showed an acceleration in price sector credit expansion and stronger household spending. The softer-than-expected June CPI had reinforced expectations the RBA will stay on the sidelines.

The Australian dollar reached almost $0.7080 before the weekend, the highest since the day before the Fed's hawkish hold on June 17. The Aussie peaked this year on June 6 near $0.7280. The $0.7070 area marks the halfway point of this year's range, with the 61.8% retracement around $0.7120. Momentum indicators are rising into stretched territory. The Aussie's 30-day correlation with US two-year yield changes has eased from beyond -0.80 in early June, the most in at least 30 years, to about -0.52.

RB Global Inc., the industrials company that trades under the RBA ticker, carries an Alpha Score of 37/100, a mixed read. The RBA stock page carries the full breakdown.

Dollar Slump Spreads Across Currencies

The dollar index fell to a marginal two-month low near 99.40 after the jobs report. It traded above 100.00 in three sessions last week and failed to settle above it once. The 200-day moving average sits just below 99.20, a level the index has not settled under since mid-May. A potential double top pattern projects toward 98.80.

The index's 30-day correlation with changes in the US two-year yield fell from the year's high near 0.80 shortly after the June FOMC meeting to nearly 0.40 by late July, the lowest since late April, before stabilizing near 0.62. The 30-day correlation with the 10-year yield peaked in early June near 0.75 and dipped below 0.10 by late July. It now sits just above 0.35.

The euro broke above the down trendline drawn off the highs from late January through May after the jobs data, trading near $1.1550 before the weekend. The next technical target is around $1.1625, which matches the mid-June high and the 200-day moving average. The euro's 30-day correlation with changes in the US two-year yield has eased from a multiyear extreme near -0.87 around the June FOMC meeting to about -0.62. Momentum indicators are rising into overbought territory. The EUR/USD profile tracks the pair's range.

The eurozone reports June industrial output and trade figures this week, which will feed the Q2 GDP revision due at the end of the week. The initial estimate showed the aggregate economy expanded 0.4%, the best since Q1 25. The swaps market discounts about an 83% chance of a hike at the September 10 ECB meeting.

Officials kept testing the yen's pain threshold through last week. The dollar pushed a little above JPY158.55, a new high since the intervention, before the US jobs report dropped it through JPY156.70, a four-day low. The JPY156.50 area marks the 61.8% retracement of the post-intervention bounce, and JPY155 was the low in both the spring intervention and the more recent operation. Momentum indicators are oversold.

The intervention has injected a new force into the relationship between the exchange rate and interest rates. For the first time since early 2023, the 30-day correlation of changes in the exchange rate and the 10-year US yield has slipped into inversion. The correlation with the 10-year JGB fell from around 0.25 before the intervention to almost nothing, and the correlation with the two-year Japanese yield is slightly inverted at -0.05.

Japan reports June current account data early Monday, a release that has fallen short of May's reading in 13 straight years. July producer prices land Thursday, with the year-over-year pace at 7.1%, the highest since the end of Q1 23, exacerbated by the weak yen lifting energy and commodity costs. The swap market now prices about a 65% chance of a BOJ hike next month, up from about 23% before the intervention. The prior episode is covered in the BOJ hike and RBA hold analysis.

Sterling traded in a roughly $1.3420-$1.3505 range through Monday, August 3, and stayed there until the US jobs data lifted it to almost $1.3510. It posted an ostensibly bullish outside up day by trading on both sides of the previous day's range and settling above its high. Last month's high was closer to $1.3560. The halfway mark of this year's range is about $1.3505, and the $1.3590 area is the 61.8% retracement of sterling's losses since the late January high, slightly shy of $1.3870. The GBP/USD profile tracks the pair's recent range.

The UK publishes its preliminary Q2 GDP estimate Thursday. After 0.6% quarterly growth in Q1, the median forecast in Bloomberg's survey looks for 0.2%. Cumulative monthly GDP was 0.8% in Q1 and flat in April and May, with June details due alongside. The Bank of England meets September 17. The swaps market is slightly less than fully discounting a hike this year, a sharp shift from July 23, when nearly two hikes were priced at 48 basis points.

The diverging employment reports narrowed the US two-year premium over Canada by almost nine basis points, the largest such move since late March, to about 123 basis points, the narrowest in more than two months. The dollar had been finding support on a closing basis near CAD1.4000. It punched through and fell to slightly below CAD1.3945. The CAD1.3980 area marked the 38.2% retracement of the greenback's rally from May 1, with the 50% retracement near CAD1.3900. It settled below the lower Bollinger Band around CAD1.3965, and momentum indicators are stretched.

The Canadian dollar remains sensitive to changes in the US two-year premium. The 30-day correlation between the exchange rate and the two-year differential reached nearly 0.75 in late July, the highest since Q1 18. Since late July, the correlation between the exchange rate and the S&P 500 has swung positive, around 0.20, the highest since June 2025. The Bank of Canada does not meet until September 2, and swaps price practically no chance of a change even after July's employment report showed the unemployment rate slip to 6.4% from 6.5%, a two-year low, despite a higher participation rate at 65.1%.

The drop in US rates and the rally in US stocks after the jobs report sent the dollar to about MXN17.0925. The multiyear low recorded in mid-February sits near MXN17.0865. Previous support around MXN17.20 may now offer resistance. Several high-yielding emerging market currencies, the Mexican peso and the Hungarian forint among them, gained against the dollar last week despite the squeeze in yen and Swiss franc funded carry trades.

June industrial production is due August 11. Output contracted in Q1, then did better in Q2 on a 2.1% April surge, the most in five years, before falling 0.8% in May. The IMEF manufacturing index warned growth is fragile. Mexico's exports of AI-related hardware and computer equipment to the United States, including commercial servers and data center infrastructure, surpassed automotive shipments for the first time, driven by an 84.5% year-over-year surge to a record $105.8 billion between January and May. Taiwan companies assembling in Mexico have made the island the country's third-largest trading partner, up from eighth in 2022.

The dollar fell to almost CNH6.74 before the weekend, the lowest since February 2023. The low in early Q1 23 was about CNH6.6975, the next obvious chart area. Beijing expects to report July lending figures and the Q2 current account surplus this week. The IMF expects the surplus to fall to 3.5% of GDP this year from 3.8% last year, and to 3.3% next year. The OECD sees it steady at 3.8% before rising to 4% next year. The median forecast in Bloomberg's survey is 3.5% this year and 3.2% next.

Officials continue to signal acceptance of gradual yuan appreciation. The currency is up about 3.6% year-to-date against the dollar, the strongest in the region, and has risen more against most G10 currencies than against the US dollar. The PBOC's dollar fix has fallen in all but six weeks since the end of last September; last week was the seventh. The greenback's losses before the weekend point to a lower fix Monday.