Weekly Outlook · 5 July 2026

Central bank divergence sharpens as the Fed holds tight on sticky inflation while dovish pressure builds in Europe and the UK.

The macro backdrop this week is defined by widening policy paths across major central banks. The Fed remains anchored at elevated rates with inflation still double target, forcing a hawkish hold despite a sharp payrolls miss. In contrast, the ECB and Bank of England are edging toward cuts as growth weakens and inflation cools, while the Bank of Japan and RBNZ prepare to tighten further. Risk sentiment is mixed, with European equities rallying while US stocks edge lower and volatility remains subdued.

What was driving markets

Fed trapped by inflation, supported by growth

US inflation remains stuck well above target with core price pressures elevated, forcing the Fed to hold rates high despite a sharp miss in June payrolls. Economic growth was revised sharply higher last quarter and consumer spending remains solid, giving the central bank room to stay restrictive. This hawkish hold continues to underpin the dollar even as labour market cooling becomes more visible. But we'll have to keep an eye out on Kevin Warsh (the new fed chair), who could still be favoring more cuts this year, cause he sees the inflation as a temporary shock.

Europe and UK shift dovish as disinflation takes hold

Both the eurozone and UK are seeing inflation fall meaningfully while growth stalls or contracts, opening the door for rate cuts despite recent hikes. The ECB delivered a hike in June but slowing price pressures and fragile activity reduce the odds of further tightening. The Bank of England is signaling a dovish pivot as wage pressures ease and bond yields drop, weighing on the euro and pound against more hawkish peers.

Japan and New Zealand tightening into strength

The Bank of Japan raised rates in June and explicitly pointed to more hikes ahead, supported by tight labour markets, surging producer prices, and strong exports. The RBNZ is holding but has flagged hikes are likely soon as inflation stays above target and growth proves resilient. Both central banks are moving against the global easing trend, providing clear support for the yen and kiwi.

Commodity bloc divided by policy, not prices

The Australian and Canadian dollars are getting support from hawkish central bank stances as sticky inflation forces both the RBA and Bank of Canada to hold rates elevated and warn of further tightening. In contrast, the franc is weighed down by the SNB's explicit preference for intervention over hikes, even as growth slows and inflation sits well below target. Oil and gold are both rising, but currency direction is being driven more by rate differentials than commodity moves.

What was on the radar that week

• RBNZ rate decision. The Reserve Bank of New Zealand decides policy with markets pricing in the start of a tightening cycle as inflation stays elevated.
• FOMC minutes. Fed meeting notes will clarify how policymakers are weighing sticky inflation against emerging labour market cooling.
• US and Canada trade balances. Both countries release trade data midweek, offering insight into external demand and terms of trade pressures.
• US jobless claims. Weekly claims data will confirm or contradict the sharp payrolls miss and help shape Fed expectations.
• Lagarde speech. The ECB President speaks early in the week and may offer clues on how quickly the central bank pivots toward easing.

The bottom line

This week is about central bank divergence driving currency direction. The Fed and antipodean banks are holding or preparing to tighten while Europe and the UK lean dovish, creating clear rate differentials that favor the dollar, yen, and kiwi over the euro and pound. Watch the RBNZ decision and FOMC minutes for confirmation of this theme.

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