Forex News

Federal Reserve (Fed) Bank of New York President John Williams said in the Future of Market Liquidity and Functioning Workshop in New York on Thursday that inflation remains “far too high,” while stressing that policymakers are actively debating different inflation scenarios as energy prices, artificial intelligence investment and productivity trends shape the outlook.

Key takeaways:

Inflation is still “far too high,” keeping the Federal Reserve focused on the risks to price stability.

Markets still expect Oil prices to decline over the next six to 12 months.

Monetary policy remains focused on how energy prices feed through into inflation.

AI investment is currently driving inflation, adding to demand and cost pressure.

The Fed is actively debating various inflation scenarios as uncertainty remains elevated.

Williams said the latest Fed Minutes captured a “collective reaction function,” reflecting how policymakers are assessing incoming data and risks.

In the longer run, Williams said AI investment should become a positive supply shock.

His base case is for broader AI adoption to boost productivity over time.”

BNY’s Geoff Yu notes the International Monetary Fund (IMF) has trimmed its 2026 global growth forecast to 3.0%, with uneven impacts across energy exporters, tech economies and low-income importers, influencing global equities. The disinflation trend appears stalled as headline inflation is projected to re-accelerate before easing. Yu sees markets wrestling with stretched valuations, fading momentum and a shift from acceleration to consolidation.

IMF downgrades and stagflation concerns

"The International Monetary Fund has inched its 2026 global growth forecast down again to a sluggish 3.0%. Growth is projected to rebound to 3.4% in 2027, but that is still below ‌the average of 3.5% seen in 2024 and 2025."

"Global headline inflation is seen rising from 4.1% in 2025 to 4.7% in 2026 before easing to 3.9% in 2027, suggesting the disinflation trend has stalled."

"Stagflation risks remain in prospect. The IMF has downgraded its global growth forecasts, while both the BoJ and New York Fed have warned that higher energy prices and tariffs will continue to feed through to inflation."

"We concur with the view that geopolitical tail risks are well-covered, but that alone is unlikely to support a market that is grappling with stretched valuations and fading momentum ahead of earnings season."

"Risks remain tilted to the downside, with renewed conflict, trade fragmentation and a technology correction the key threats."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• USD/CAD trades little changed as both the US Dollar and the Canadian Dollar face headwinds.
• Lower Oil prices weigh on the commodity-linked Canadian Dollar.
• A softer US Dollar limits the pair's upside despite stronger-than-expected US Jobless Claims.

USD/CAD trades around 1.4170 on Thursday at the time of writing, virtually unchanged on the day, as weakness in the US Dollar (USD) offsets the negative impact of lower Oil prices on the Canadian Dollar (CAD).

The Canadian Dollar remains under pressure as Crude Oil prices extend their corrective pullback after the recent geopolitical-driven rally. Although tensions in the Middle East remain elevated after the United States (US) and Iran exchanged military strikes for a second consecutive day, traders appear to be unwinding part of their recent bullish Oil positions, weighing on the commodity-linked Loonie.

Still, downside pressure on the Canadian currency remains limited by expectations that the Bank of Canada (BoC) could resume tightening later this year. The central bank left its policy rate unchanged at 2.25% in June, while swap markets now price roughly a 60% chance of a rate hike before year-end, up from around 40% earlier this week.

Scotiabank strategists Shaun Osborne and Eric Theoret said that "the CAD has performed relatively well through the overnight volatility," adding that negative sentiment toward the Canadian Dollar continues to moderate despite recent market swings.

Meanwhile, the US Dollar also weakens on Thursday, preventing USD/CAD from moving higher despite stronger-than-expected US labor market data. The US Department of Labor reported that Initial Jobless Claims declined to 215K in the week ending July 4, below the previous week's revised 217K reading and the market forecast of 218K. Continuing Jobless Claims edged up slightly to 1.814M.

The positive labor market data provides some support to the Greenback by reinforcing the view that the US economy remains resilient. However, the US Dollar continues to ease as investors remain focused on broader market sentiment and geopolitical developments, leaving USD/CAD trapped in a narrow range around 1.4170.

ABN AMRO’s Rogier Quaedvlieg highlights that US labour-market conditions are weaker than headline unemployment suggests, as rapidly declining participation is holding the rate down. He notes that payroll growth has slowed sharply, household employment is falling, and only a small part of the participation drop is demographic. Behavioural withdrawal, especially among older and younger workers, risks a quick rise in unemployment if job creation stays weak.

Participation tailwind hides labour slack

"Payrolls slowed sharply in June, confirming our earlier warning that frontloaded hiring would likely be followed by payback."

"Last week’s labour-market report delivered the kind of payroll print we warned about in our global monthly, even if the timing was earlier than expected."

"Despite the weak household employment numbers, the unemployment rate has remained stable and has even declined, dropping below 4.2%."

"Participation has fallen by 0.9pp since December, from 62.4% to 61.5%."

"Had participation changed only because of demographics, the unemployment rate would now be around 5.2%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

DBS Group Research economist Sherilyn Chew notes that renewed geopolitical risk has lifted yields across Asia, but sees Indian G-Secs as offering a tactical opportunity. She argues the India sell-off is mainly macro repricing, with domestic fundamentals and structural demand intact. Foreign participation remains supportive, and DBS views the 10-year sector as attractive for adding duration once risk sentiment stabilises.

Indian G-Secs repricing seen as transient

"Renewed geopolitical risk has pushed yields higher across the region, but we would differentiate between markets where the repricing presents a more compelling entry and those where it reinforces existing concerns."

"For India, the sell-off looks largely driven by a broad-based macro repricing rather than any deterioration in domestic fundamentals."

"With supportive structural demand and ongoing foreign participation still supportive, the spike is likely transient and should fade once risk sentiment stabilises."

"As such, we view this repricing episode as a tactical opportunity to add duration exposure in the 10-year sector, at more attractive entry levels."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

ING strategists Michiel Tukker and Benjamin Schroeder note that the Federal Reserve’s June minutes confirmed a more hawkish stance despite an unchanged policy rate. They highlight that nine officials pencilled in higher rates by year-end and that most see further policy firming as likely if inflation stays elevated due to AI-driven demand, high energy prices and tariffs, though ING’s base case expects moderation.

June minutes reinforce hawkish Fed stance

"This more upbeat take on the economy and the labour market was also reflected in the more hawkish stance of the Fed, which was just confirmed by the minutes of the June meeting."

"While voting unanimously to keep rates on hold, that meeting saw nine Fed officials pencilling in higher rates by the end of this year."

"Most officials agreed that “some policy firming would likely be warranted” in a scenario in which inflation remained elevated due to strong AI-driven demand, high energy prices and tariffs."

"This is not our base case for inflation, where we see more room for moderation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

TD Securities strategists highlight that the June Federal Open Market Committee (FOMC) Minutes showed rising concern over inflation risks, even as the United States (US) labor market remains stable. Some participants saw a case for a June hike but backed holding rates, while most signaled willingness to pursue further policy firming if supply-side shocks, including Oil and tariffs, push inflation higher.

Fed minutes stress hawkish supply risks

"The June FOMC minutes showed participants concerned about rising inflation risks. "A few" participants saw the case for hiking in June, but still supported keeping rates on hold."

"The minutes also noted that the labor market remained stable, and that inflation risks were rising due to AI, tariffs, supply chain disruptions, and higher oil prices. However, in a hawkish development, "most" participants saw the case for "policy firming" if these supply issues raise inflation, even if the labor market remains stable."

"In other words, these participants would support hikes even if the labor market is not a source of inflation, and seemingly regardless of how inflation expectations evolve."

"A new closure of the Strait of Hormuz might be enough to achieve this scenario.On Fed communications, the "majority" supported the shortening of the statement. No further information on Chair Warsh's task forces was provided. Notably, the structure of the minutes was not altered."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• USD/JPY edges lower as a softer US Dollar lends modest support to the Japanese Yen.
• Traders remain alert for possible intervention by Japanese authorities.
• Hawkish Fed expectations and a wide US-Japan rate gap keep USD/JPY tilted to the upside.

USD/JPY trades slightly lower on Thursday as a mildly softer US Dollar (USD) lends support to the Japanese Yen (JPY). At the time of writing, the pair is trading around 162.45, hovering near 40-year highs.

Persistent weakness in the Yen keeps traders alert for possible intervention by Tokyo in the foreign exchange market. However, previous suspected intervention efforts proved short-lived because structural headwinds, including Japan's low interest rates and deteriorating fiscal outlook, remain a drag on the Yen.

Japan Chief Cabinet Secretary Minoru Kihara said on Thursday that the government wants to "secure market trust by stably lowering the government debt-to-GDP ratio." Kihara added that the government is watching markets with a "very high sense of urgency."

Meanwhile, a key near-term headwind for the Japanese Yen stems from renewed fighting between the United States (US) and Iran, which has triggered a rebound in Oil prices as security risks once again threaten to disrupt crude flows through the Strait of Hormuz.

Higher Oil prices tend to weigh on the Yen because Japan relies heavily on imported energy, particularly from the Middle East.

The rebound in Oil prices has also brought inflation back into focus, increasing pressure on central banks to keep monetary policy restrictive. Markets are currently pricing in a 63% probability of a Federal Reserve (Fed) interest rate hike at the September meeting.

Hawkish Fed expectations, combined with escalating geopolitical tensions, keep the US Dollar's downside contained. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 101.00 after hitting an intraday low of 100.79.

Meanwhile, the Bank of Japan (BoJ) remains on a policy normalization path, but its gradual pace of tightening continues to lag behind other major central banks. The wide interest rate differential between Japan and the United States continues to support USD/JPY.