KUWAIT: Global markets this week continued to navigate a more hawkish monetary policy environment led by the United States, where the Federal Reserve kept rates unchanged at 3.50 percent-3.75 percent but signaled growing support for future tightening as inflation forecasts were revised higher to 3.6 percent for 2026. Strong US retail sales of +0.9 percent MoM, resilient labor market conditions with jobless claims at 226K, and firm consumer spending reinforced expectations that policy will remain restrictive.
Treasury markets reflected this shift, with short-end yields moving higher while equities rebounded, supported by technology and AI-related optimism. DXY closed the week at 100.849 [+1.10 percent]. Meanwhile, stronger Canadian retail sales also pointed to resilient consumer demand, with advance estimates indicating sales rose 1.0 percent MoM in May following a 0.5 percent MoM increase in April. USDCAD closed the week at 1.4153 [+1.17 percent].
In Europe, the European Central Bank maintained a hawkish stance as officials defended the recent increase in the deposit rate to 2.25 percent, while warning that inflation risks could keep price growth elevated through 2026. EURUSD closed the week at 1.1471 [-0.84 percent]. Elsewhere, the Swiss National Bank maintained rates at 0 percent while reiterating its readiness to intervene in FX markets as inflation remained subdued at 0.6 percent YoY. USDCHF closed the week at 0.8071 [+1.24 percent]. In the United Kingdom, the Bank of England held rates at 3.75 percent in a 7-2 vote, supported by inflation holding at 2.8 percent YoY, stronger retail sales of +1.2 percent MoM, and an unemployment rate of 4.9 percent.
GBPUSD closed the week at 1.3232 [-1.30 percent]. Across Asia-Pacific, the Bank of Japan raised rates by 25bps to 1 percent, its highest level since 1995, while signaling further tightening amid rising inflation risks and continued yen weakness.
The Reserve Bank of Australia maintained its cash rate at 4.35 percent, balancing persistent inflation against slowing economic momentum, while New Zealand reported GDP growth of 0.8 percent QoQ and 1.5 percent YoY, supporting hawkish expectations ahead of the July meeting. AUDUSD and NZDUSD closed the week at 0.7012 [-0.50 percent] and 0.5738 [-1.63 percent] respectively.
Commodity markets remained focused on the evolving US-Iran ceasefire agreement, with Brent crude closing the week at 80.57 [-7.74 percent], and spot gold at 4155.71 [-1.51 percent], while yield curve dynamics remained closely monitored through the US 2s10s and 5s30s spreads, which closed the holiday-shortened week at 27.0 bps [-12.4 bps] and 66.3 bps [-9.5 bps], respectively.
US and Canada
The Federal Reserve unanimously left the federal funds rate unchanged at 3.50 percent-3.75 percent at its first meeting under Chairman Kevin Warsh, while adopting a more hawkish tone centered on restoring price stability. Policymakers revised their 2026 median inflation forecast sharply higher to 3.6 percent from 2.7 percent, while core inflation projections were raised to 3.3 percent from 2.7 percent. At the same time, growth expectations were trimmed to 2.2 percent from 2.4 percent, while the unemployment forecast improved slightly to 4.3 percent from 4.4 percent.
Although officials remain divided on the policy outlook, with nine members projecting at least one rate hike this year and six anticipating two or more increases, Warsh emphasized the Committee’s commitment to achieving its 2 percent inflation target. Strong labor market conditions, resilient economic growth, and persistent inflationary pressures linked to energy costs and AI-related investment continue to support a restrictive policy stance, with markets now fully pricing in a rate increase by October. DXY last printed at 100.849.
US retail sales rise
US consumer spending remained resilient in May, with retail sales rising 0.9 percent MoM, marking a fourth consecutive monthly increase despite elevated fuel prices. Excluding gasoline stations, sales still advanced a solid 0.7 percent MoM, highlighting broad-based consumer demand. Eleven of thirteen retail categories recorded gains, led by a 1.2 percent rebound in motor vehicle sales and a fifth consecutive increase in online retail spending. Control-group sales, which feed directly into GDP calculations, also rose 0.7 percent MoM, indicating strong underlying consumption momentum heading into the summer period.
While higher gasoline prices contributed to the headline strength through a 3.4 percent increase in fuel receipts, household spending has also been supported by larger tax refunds, rising equity markets, and continued labor market resilience. The data suggest consumer activity remains a key pillar supporting US economic growth despite persistent inflationary pressures and tighter financial conditions.
Canada retail sales rise
Canadian retail sales continued to expand in the second quarter, with an advance estimate indicating receipts rose 1.0 percent MoM in May following a 0.5 percent MoM increase in April. The data imply retail sales growth of approximately 1.9 percent in Q2, assuming June is flat, extending the streak of quarterly gains to eight consecutive quarters. April’s increase was largely driven by a 5.1 percent MoM rise in gasoline station and fuel vendor sales, reflecting higher fuel prices, while retail sales excluding gasoline were flat and unchanged in volume terms. Core retail sales, which exclude gasoline stations and motor vehicle dealers, declined 0.7 percent MoM for a second consecutive month, led by weaker food and beverage (-2.0 percent MoM) and general merchandise (-1.7 percent MoM) sales. However, motor vehicle and parts dealers recorded a 1.7 percent MoM increase, supporting overall consumer spending. USDCAD last printed at 1.4153.
Europe and the UK
ECB Chief Economist Philip Lane defended the Bank’s recent 25bps rate increase, which lifted the deposit rate to 2.25 percent, citing persistent inflationary pressures, resilient economic activity, and a stable financial system. Lane reiterated expectations that inflation would remain elevated through 2026 and noted that the upper bound of the ECB’s neutral rate is estimated at around 2.5 percent, suggesting further policy tightening remains possible should underlying price pressures persist. Separately, European Central Bank President Christine Lagarde warned that AI could create new vulnerabilities for financial stability, highlighting the risk of financial crises arising from increasingly interconnected and powerful AI systems. The ECB has already stress-tested financial institutions against scenarios and plans further engagement with bank executives to strengthen resilience and preparedness against AI-related threats. EURUSD last printed at 1.1471.
The Swiss National Bank maintained its policy rate at 0 percent while reiterating its willingness to intervene in foreign exchange markets if necessary to prevent excessive appreciation of the Swiss franc. Policymakers modestly increased their inflation forecast for 2026 to 0.6 percent from 0.5 percent, while projections for 2027 and 2028 were set at 0.6 percent and 0.7 percent respectively, remaining comfortably within the SNB’s 0 percent-2 percent price stability range. Although inflation has accelerated, the central bank continues to view medium-term price pressures as subdued, supported by a weaker franc and easing haven demand following the recent Middle East ceasefire.
The SNB maintained its growth outlook of around 1.0 percent for 2026 and 1.5 percent for 2027, while emphasizing that uncertainty surrounding inflation and economic activity remains elevated. The decision reinforces the Bank’s preference for an accommodative stance while retaining flexibility to respond to renewed currency appreciation risks. USDCHF last printed at 0.8071.
The Bank of England kept Bank Rate unchanged at 3.75 percent in a 7-2 vote, although two policymakers supported an immediate increase to 4 percent amid ongoing inflation concerns. Recent economic data provided a mixed but generally supportive backdrop for holding rates steady. UK inflation remained unchanged at 2.8 percent YoY in May, below expectations of 3.0 percent, while services inflation rose to 3.7 percent. In May, retail sales rebounded strongly, increasing 1.2 percent MoM after a revised 1.0 percent decline in April, reflecting stronger consumer demand supported by promotional activity and favorable weather conditions.
Labor market indicators also showed signs of stabilization, with payroll employment increasing by 2K in May and unemployment declining to 4.9 percent. The BoE lowered its projected inflation peak to 3.25 percent in Q4 2026 from 3.6 percent previously, citing easing energy price pressures following the US-Iran truce. Nevertheless, policymakers maintained a cautious stance, highlighting continued upside risks to inflation and uncertainty surrounding the durability of the ceasefire. GBPUSD last printed at 1.3232.
Asia-Pacific
The Bank of Japan increased its benchmark interest rate by 25 bps to 1 percent, marking the highest policy rate since 1995 and signaling a continued path towards monetary normalization. The decision passed by a 7-1 vote as policymakers highlighted rising risks that underlying inflation could exceed the Bank’s 2 percent target amid elevated energy prices and strengthening inflation expectations. The BOJ also announced that it will cease reducing bond purchases from April 2027, maintaining monthly purchases at approximately JPY 2T ($12.5B) and effectively completing a major phase of policy normalization.
Markets interpreted the statement as notably hawkish, with overnight swaps now pricing a 60 percent probability of another rate increase by October. Meanwhile, the yen remains under pressure near multi-decade lows against the US dollar despite higher domestic rates, increasing the risk of further intervention by Japanese authorities should currency weakness intensify. USDJPY last printed at 161.30.
The Reserve Bank of Australia unanimously left its cash rate unchanged at 4.35 percent, pausing its tightening cycle as policymakers assess the impact of previous rate increases on economic activity. Governor Michele Bullock acknowledged that inflation remains above the Bank’s 2 percent-3 percent target range but noted growing evidence that restrictive monetary policy is slowing demand. Recent data indicate weakening economic momentum, with unemployment rising to its highest level in four-and-a-half years, household spending softening, and housing market activity moderating.
While the RBA maintained a tightening bias and stressed that further rate increases remain possible should inflationary pressures persist, markets reduced expectations for additional hikes later this year. Policymakers also highlighted the importance of developments in global energy markets, noting that easing oil prices following the US-Iran ceasefire agreement could help alleviate inflation risks, although uncertainty surrounding the outlook remains elevated. AUDUSD last printed at 0.7012.
New Zealand’s economy expanded by a stronger-than-expected 0.8 percent QoQ in the first quarter of 2026, following an upwardly revised 0.5 percent increase in the previous quarter, while annual growth held at 1.5 percent YoY. The expansion was driven by gains in manufacturing, agricultural production, services activity, household spending, and investment, while GDP per capita also increased 0.5 percent QoQ.
However, much of the improvement occurred before the Middle East conflict intensified, with subsequent rises in fuel prices weighing on consumer confidence and business sentiment. As a result, economists expect economic activity to have slowed significantly in the current quarter. Despite these headwinds, markets continue to price an 80 percent probability of a 25 bps rate hike by the Reserve Bank of New Zealand in the next meeting on July 8, reflecting concerns that inflation risks may persist even as growth momentum moderates. NZDUSD last printed at 0.5738.
Kuwait
USDKWD closed last week at 0.30730.
