Today’s Market Outlook
Dollar Weakness and Yen Weakness Intersect as Markets Turn to U.S. PPI and Middle East Risks
■ Market Overview
The Tokyo session has been shaped by a combination of U.S. dollar weakness and Japanese yen weakness.
Yesterday’s U.S. CPI report came in below market expectations, pushing Treasury yields lower and triggering broad dollar selling.
EUR/USD and GBP/USD remained firm under the weaker-dollar environment, while EUR/JPY and GBP/JPY also moved higher as yen selling continued.
USD/JPY, however, has been caught between dollar selling and yen selling, producing volatile but directionless trading between the low 162s and levels just below 162.
The broader decline in the U.S. Dollar Index confirms that dollar selling remains the dominant theme across the FX market.
At the same time, the underlying yen-weakness trend remains intact due to persistent carry-trade demand supported by the wide U.S.–Japan interest-rate differential.
Today’s U.S. PPI report will determine whether the dollar weakness triggered by yesterday’s CPI continues or begins to reverse.
■ U.S. Dollar
The main driver of the weaker dollar has been the slowdown in U.S. consumer inflation.
Headline CPI rose 3.5% year-on-year, while core CPI increased 2.6%. Both readings came in below the previous figures and market expectations.
The data pushed U.S. Treasury yields lower and encouraged broad dollar selling.
The dollar briefly recovered after Fed Chair Warsh reiterated the Federal Reserve’s commitment to controlling inflation.
However, his comments were not enough to fully reverse the dollar weakness triggered by the softer CPI report.
The market is now caught between expectations of easing inflation and continued caution over the Fed’s hawkish policy stance.
Today’s PPI report is therefore likely to become the next major catalyst for the dollar.
■ USD/JPY
USD/JPY continues to fluctuate between the low 162s and levels just below 162.
Broad dollar selling is limiting the upside, while continued yen selling is preventing a more significant decline.
Domestic Japanese developments, including Finance Minister Katayama’s proposals to encourage GPIF investment in domestic assets and potentially include retail government bonds in NISA accounts, have been interpreted as supportive for the yen.
Nevertheless, carry-trade demand remains strong because of the wide interest-rate gap between the United States and Japan.
As a result, yen-positive headlines have not been enough to reverse the broader yen-weakness trend.
USD/JPY remains caught between resistance above 162 and persistent support from structural yen selling.
Until the PPI release, nervous range-bound trading is likely to continue.
■ Japanese Yen
The yen is being influenced by conflicting domestic and international factors.
Domestically, the government’s efforts to encourage investment in Japanese financial assets through the GPIF and NISA framework can be viewed as yen-supportive.
However, the U.S.–Japan interest-rate differential remains wide, sustaining demand for yen-funded carry trades.
In addition, a further rise in crude oil prices caused by worsening Middle East tensions would increase Japan’s energy import costs and create renewed concerns over the trade balance.
This means that although there are some positive catalysts for the yen, the broader environment remains unfavorable for sustained yen buying.
■ U.S. PPI
Today’s main event is the U.S. Producer Price Index.
Market expectations are as follows:
Headline PPI, year-on-year
Forecast: 6.2%
Previous: 6.5%
Core PPI, year-on-year
Forecast: 5.1%
Previous: 4.9%
Headline inflation is expected to slow, while core inflation excluding food and energy is forecast to accelerate.
Yesterday’s CPI report confirmed easing consumer inflation and triggered broad dollar selling.
However, if core PPI exceeds expectations, markets may conclude that inflationary pressure at the producer level remains persistent.
That could revive expectations of tighter Federal Reserve policy and trigger another round of dollar buying.
The market is likely to react particularly strongly to the size of any deviation in the annual core PPI reading.
A result contrasting sharply with yesterday’s CPI could produce significant volatility in U.S. yields and the dollar.
■ Middle East Developments
The Middle East remains a major market theme.
U.S. Central Command is reported to have begun strikes against Iran at 6:00 a.m. U.S. Eastern Time on July 15.
The renewed escalation has increased geopolitical risk and placed upward pressure on crude oil prices.
Higher oil prices could revive inflation concerns and influence expectations for future U.S. CPI and PPI readings.
Continued strength in crude oil could therefore reinforce expectations of further Fed tightening and support the dollar.
On the other hand, a more severe risk-off move could lead to simultaneous selling in equities and buying in both the dollar and the yen, creating more complex FX price action.
■ Canadian Dollar
The Bank of Canada is also scheduled to announce its policy decision today.
Markets broadly expect the central bank to keep its policy rate unchanged at 2.25%.
The main focus will be Governor Macklem’s press conference.
Investors will look for his assessment of slowing Canadian growth, the inflation outlook, and the future balance between possible rate cuts and further tightening.
Canadian manufacturing and wholesale sales will also be released, making the Canadian dollar sensitive to both economic data and the central-bank decision.
■ Equity Markets
Several major U.S. companies are scheduled to report earnings today.
The key names include:
Morgan Stanley
BlackRock
BNY Mellon
Johnson & Johnson
Following yesterday’s bank earnings, investors will continue to assess how the higher-rate environment is affecting financial-sector profitability.
At the same time, worsening Middle East tensions, rising oil prices, and higher U.S. yields could weigh on the broader equity market.
Equity-market reactions will remain important for both overall risk sentiment and the direction of the dollar.
■ Today’s Key Economic Events
The main scheduled releases include:
Eurozone Industrial Production
U.S. MBA Mortgage Applications
New York Fed Manufacturing Index
U.S. PPI
Canada Manufacturing Sales
Canada Wholesale Sales
Bank of Canada Policy Decision
Federal Reserve Beige Book
The primary focus remains the U.S. PPI report.
However, the New York Fed Manufacturing Index and the Beige Book will also provide important information about the condition of the U.S. economy.
■ Central Bank Speakers
Several central-bank officials are scheduled to speak today:
Fed Chair Warsh
New York Fed President Williams
Fed Governor Cook
St. Louis Fed President Musalem
Bank of Italy Governor Panetta
Bank of England Chief Economist Pill
Bundesbank President Nagel
Bank of Canada Governor Macklem
The main event will be Fed Chair Warsh’s semiannual monetary policy testimony before the Senate Banking Committee.
Yesterday’s CPI report was softer than expected, but today’s PPI data could quickly complicate the inflation outlook.
Markets will focus on whether Fed officials show greater confidence that inflation is slowing or continue to emphasize the possibility of further tightening.
■ Key Focus for the London and New York Sessions
- Whether annual core PPI exceeds expectations
- Whether the dollar weakness following CPI continues
- Whether U.S. Treasury yields begin rising again
- Whether USD/JPY can remain above 162
- Whether yen-selling pressure outweighs domestic yen-supportive developments
- Middle East developments and crude oil prices
- The Bank of Canada’s policy decision and guidance
- The equity-market reaction to major U.S. corporate earnings
The combination of U.S. PPI and Middle East developments will be especially important.
If inflation data is strong while crude oil continues to rise, renewed dollar buying could accelerate.
If PPI also comes in weak, the dollar selloff that began after CPI may deepen.
■ Bottom Line
Today’s market is being driven by a combination of dollar weakness and yen weakness.
Yesterday’s softer-than-expected U.S. CPI report pushed Treasury yields lower and triggered broad dollar selling.
At the same time, structural yen-selling pressure remains strong due to carry-trade demand and the wide U.S.–Japan interest-rate differential.
The main focus today is the U.S. PPI report.
Headline PPI is expected to slow, while core PPI is forecast to accelerate, creating the possibility of a result that contrasts with yesterday’s softer CPI data.
A stronger core PPI reading could revive concerns over persistent inflation and trigger renewed dollar buying.
A weaker result would reinforce the current dollar-selling trend.
Middle East tensions and higher crude oil prices also remain critical because of their potential impact on inflation and monetary-policy expectations.
Markets will therefore be watching U.S. PPI, Fed Chair Warsh’s testimony, Middle East developments, the Bank of Canada decision, and U.S. corporate earnings to determine whether the current dollar weakness continues or reverses.
