Drivers for the Week of August 11, 2025

The US dollar is expected to remain under pressure due to intensifying stagflation concerns, with upcoming CPI data projected to quicken and retail sales facing downside risk, compounded by a structural drag on dollar recycling from trade policy. The UK also faces significant stagflation headwinds, threatening renewed GBP weakness as a loosening labor market, persistent high wage growth, and a projected sharp Q2 GDP slowdown weigh on the outlook. Elsewhere, central bank policies diverge: Norges Bank is anticipated to hold rates, with NOK sensitive to CPI data that could validate dovish market pricing, while the RBA is poised to deliver a 25bps rate cut given inflation progress. In contrast, the Bank of Japan is unlikely to significantly tighten, limiting JPY appreciation despite weak Q2 GDP.

Analysis

The US dollar and British pound are facing significant stagflationary headwinds, creating a cautious market outlook. In the US, the dollar is on the defensive due to narrowing interest rate differentials and economic data pointing towards rising inflation alongside weakening growth. Upcoming US CPI is expected to quicken to 2.8% y/y, while retail sales face downside risk, with the CARTS data suggesting a potential contraction. This is compounded by a structural drag on the USD from the Trump administration's trade policies, which are expected to reduce the recycling of foreign capital into US securities. Similarly, the UK is on a stagflation watch, threatening the pound's recent outperformance. A projected sharp slowdown in Q2 GDP to 0.1% q/q from 0.7% in Q1, a loosening labor market, and persistently hot wage growth at 5.0% y/y despite an estimated 0% productivity in 2025 underscore this risk. In contrast, other central banks are on divergent paths. The Reserve Bank of Australia is poised to deliver a 25bps rate cut to 3.60% as inflation cools, with Q2 headline CPI at 2.1%. The Norges Bank is expected to hold its policy rate at 4.25%, but the NOK's direction hinges on July CPI data; a reading below forecasts could validate the market's more dovish pricing and undermine the currency. The Bank of Japan remains constrained by weak growth, with Q2 GDP forecast at just 0.1% q/q, limiting any potential for JPY appreciation.

Key Decisions for Investors

• Given the pronounced stagflationary pressures in both the US and UK, investors should maintain a cautious to bearish stance on the USD and GBP, with upcoming inflation and growth data acting as key negative catalysts.
• The Reserve Bank of Australia's expected 25bps rate cut is largely priced in and supported by moderating inflation, suggesting the AUD/USD will likely remain range-bound between 0.6400 and 0.6600, offering opportunities for range-trading strategies.
• Monitor Norway's July CPI data as the primary driver for the NOK; a print below the Norges Bank's 3.1% forecast could trigger currency weakness by validating the market's dovish rate cut expectations.
• The structural decline in foreign demand for US assets presents a long-term headwind for the dollar, warranting a strategic review of long-duration and unhedged US asset exposure.
• With the Bank of Japan unlikely to pursue significant rate hikes amid weak economic growth, any JPY strength should be viewed as temporary, reinforcing a strategy of trading within the established 142.00-150.00 range for USD/JPY.