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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Market Review]: Tariff inflation is emerging, and non-agricultural data may determine the prospect of the Federal Reserve's interest rate cut." Hope it will be helpful to you! The original content is as follows:
Last Friday, the US dollar index fluctuated wide, but after Trump announced the end of trade negotiations with Canada, the US dollar index plunged in the short term and turned to a decline. As of now, the US dollar is priced at 97.13.
Geographical conflict:
①Trump: The ceasefire in Gaza may be "close" to reach, or be achieved within one week; if Iran agrees to peace, sanctions on Iran will be lifted. If Iran continues to carry out enrichment activities, it may consider air strikes on Iran again, and does not believe that Iran hides part of the enrichment uranium before the US launches an attack; the US Senate rejects the proposal to limit Trump's power to use force against Iran. ② Iran reopens central and western airspace for international flights only. In addition, the Iranian government decided to set up a special legal working group to review the US-Israeli aggression. ③Iranian Ambassador: Iran will continue its own peaceful nuclear energy plan. ④ Director-General of the International Atomic Energy Agency: Iran may still produce enriched uranium within months. ⑤ Just guard against the Minister: Israel will take regular actions to thwart the relevant threats. ⑥ Russia launched the largest air strike on Ukraine since the conflict, and an Ukrainian F-16 fighter plane crashed. ⑦ Russian President Putin: Russia plans to cut military spending. We are preparing to hold a new round of negotiations with Ukraine and be open to talks with the United States.
Tariff policy development:
① US Treasury Secretary Bescent said trade negotiations may end by September, suggesting that negotiation deadlines may be extended. ②The EU and the United States are reported to be confident of reaching a tariff agreement before the July deadline; Japan and the United States will launch the seventh round of ministerial negotiations around the Trump administration's high tariff policy; South Korea's new trade minister went to the United States to meet with US officials, hoping to reach a "mutually beneficial" trade agreement.
U.S. consumer spending unexpectedly fell 0.1% in May, lower than market expectations of 0.1%, and inflation rose moderately. The core PCE price index in May recorded an annual rate of 2.7%, higher than expected 2.6%, setting a new high since February 2025. The U.S. core PCE price index recorded a monthly rate of 0.2% in May, with market expectations flat at 0.1%, and traders increased the bet that the Federal Reserve would cut interest rates three times in 2025.
Trump: The United States should keep interest rates at 1% or 2%; it can also be extended without extending the July 9 tariff limit, it is no big deal.
Minneapolis Fed Chairman Kashkali: It is expected that interest rate cuts will start and start twice in September, and the impact of tariffs may suspend interest rate cuts.
Trump's latest poll shows that his approval rating has dropped to its lowest point in office.
The US Senate began to debate the "Big and US" bill, and the US Congressional Budget Office believes that the bill will increase its deficit by $3.3 trillion in ten years.
The market is undergoing a transformation stage, which is not only reflected in the price trend, but also in the operating mechanism of the macro economy.
The Fed still plays the role of a "shock absorber", and although inflation data may remain high, this itself may not prevent the launch of loose policies. We may be heading towards a Federal Reserve that needs to extend the economic cycle, not just a "machine" that is acting on CPI data. The non-farm employment report (NFP) may become a catalyst, and we predict that the number of new non-farm employment in June will be much lower than the market expectations of 113,000.
Reiterate that as the key non-farm employment reports approach, we have found through observation of the market that liquidity is replacing fundamentals as the dominant force. The market has become a policy tool, and policy makers are well aware that liquidity transmission mechanisms drive asset prices. It’s not about inflation or growth, it’s about what economic system we are in and how liquidity and volatility are manifested.
The United States is expected to make important decisions on trade and fiscal policy in July. While these decisions may cause volatility, we do not expect to have a lasting impact on strong U.S. growth or markets. The environment of falling interest rates and yields supports stocks and high-quality bonds, while the dollar will continue to show signs of weakness. After a strong recent gain, global stock market returns are expected to be limited for the rest of the year.
Employment data will remain the focus of the market, despite the U.S. Independence Day holiday shortens trading hours next week. The U.S. JOLTs job opening data, which will be released on Tuesday, had previously unexpectedly risen, but the labor turnover rate (resignation and voluntary resignation) remained at an all-time low. The upcoming June non-farm employment report will be released next Thursday, especially the key - the drastic fluctuations in immigration data over the past few years have made it difficult to accurately define the employment growth benchmark needed to maintain the stability of the labor market, but the three-month moving average of 135,000 is likely to be at a reasonable range upper limit. Although the slightly higher unemployment rate (from the low to the high in the 4.2% range) coexisted with the increase in job openings, these signals together indicate that despite the moderate pace of recruitment, the job market has not yet shown an imminent crisis. It is expected that non-farm employment will increase by 116,000 in June, and the unemployment rate will rise slightly to 4.3%.
TD Securities believes that the US dollar will fall further because, as one of the largest holders of U.S. stocks, Canadian investors are under pressure to increase the hedging ratio of dollar assets and currency. “The dollar’s hedging appeal has declined since the beginning of the year, causing the demand for these funds to hedge long exposure to their U.S. assets,” TD Securities team Jayati Bharadwaj, Mark McCormick and Linda Cheng wrote in a Friday note. The further decline of the US dollar "will further prompt Canadian investors to adjust their hedging policies, which may put further downward pressure on the currency pair." In the first half of 2025, the Canadian dollar has risen by more than 5% against the dollar, setting its best start in nearly a decade. TD strategists predict that the Canadian dollar will rise further in the future. They expect the Canadian dollar to rise to 1.31 against the dollar by December, which will be the strongest level since 2022 and about 4% above the current level of about 1.3665. The TD team estimates that Canadian pension funds—some of which have clear policies that are not sufficient to hedge against U.S. assets—the hedging ratios of positions held by them are about 10% to 15%. Overall, Canadian investors hold about $1.8 trillion in U.S. stock. Analysts wrote that the marginal increase of 5% of the hedge ratio could result in the dollar-Canadian dollar selling pressure.
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