investingLive Americas FX news wrap 1 Jul: Central bankers worry about inflation

Central bankers from the Federal Reserve, European Central Bank, Bank of England and Bank of Canada gathered on the same stage at the ECB Forum on Central Banking in Sintra. The central bank heads delivered a broadly cautious message, emphasizing that while inflation risks have eased, the fight to secure price stability is not over. Officials also spent considerable time discussing the challenges of central bank communication, the uncertain impact of artificial intelligence, and financial stability risks.

Price stability remains the common objective. ECB President Christine Lagarde, Fed Chair Kevin Warsh, BOE Governor Andrew Bailey, and BOC Governor Tiff Macklem all stressed that inflation remains their primary focus, even as inflation pressures have moderated in recent months.
Forward guidance is falling out of favor. Lagarde said one of her biggest regrets was being constrained by forward guidance, while Bailey warned that virtually anything central bankers say can be interpreted as policy guidance. Warsh echoed those concerns, saying if communication becomes an obstacle to good policymaking, it should be changed/eliminated, adding that the Fed will move away from forward guidance. Despite being pressed, by the moderator, there was an equal fight back against giving a bias.
Fed’s Warsh signals a reset. Warsh repeatedly emphasized returning to “first principles,” announcing the creation of Fed task forces to reassess policymaking. He said interest rates should remain the Fed’s primary policy tool, reaffirmed the central bank’s independence, and stressed the commitment to returning inflation to the 2% target while fulfilling the Fed’s dual mandate.
AI viewed as a long-term opportunity—but with uncertainty. Warsh expressed the strongest optimism, arguing the U.S. is likely to be a major beneficiary of the AI revolution, supporting stronger productivity, employment, and prosperity. Bailey was more cautious, saying the impact of AI on employment remains uncertain and requires closer international cooperation and oversight.
Economic conditions differ across regions. Lagarde said euro area inflation risks are now more balanced and rejected concerns about stagflation. Bailey pointed to a softening U.K. economy and labor market but said rate cuts are not currently under consideration. Macklem described Canada’s economy as soft while inflation remains above target, justifying the Bank of Canada’s decision to leave rates unchanged.
Financial stability concerns remain elevated. Macklem warned that elevated equity valuations and growing hedge fund participation in sovereign debt markets could amplify risks if repo market disruptions trigger forced deleveraging. Bailey also highlighted the need to monitor potential tail risks that could disrupt financial markets.

Bottom line

Despite different domestic economic conditions, the discussion revealed broad agreement among policymakers. Inflation has improved but has not been fully defeated, policy decisions will remain data dependent, and central banks are becoming increasingly reluctant to rely on explicit forward guidance. At the same time, AI is emerging as a key long-term theme—with optimism about its economic potential tempered by uncertainty over its impact on employment, inflation, and financial stability.

ISM comes in weaker than expectations

The June ISM Manufacturing PMI came in at 53.3, slightly below the 54.0 consensus estimate and down from 54.0 in May, but the report still pointed to a manufacturing sector that remains on solid footing. June marked the sixth consecutive month that the index has remained above the 50.0 expansion threshold, following a 10-month period of contraction. The reading is also consistent with continued growth in the broader U.S. economy, with ISM noting that a PMI above 47.5 has historically signaled overall economic expansion.

Looking beneath the headline, the report showed some moderation in activity after May’s strong performance. New orders eased to 56.0 from 56.8, while production slowed to 52.2 from 54.3, indicating demand and output remain healthy but are expanding at a slower pace. Employment improved to 49.7 from 48.6, though it remained below the 50.0 level, signaling manufacturing payrolls continued to contract. New export orders slipped back into contraction at 48.5, highlighting softer overseas demand.

One of the more encouraging aspects of the report was on the inflation front. The Prices Paid index fell sharply to 73.0 from 82.1, well below the 78.0 consensus estimate, suggesting that input cost pressures eased meaningfully during the month. Meanwhile, supplier deliveries slowed less dramatically than in May, pointing to continued improvement in supply-chain conditions, while inventories remained in contraction as manufacturers kept stock levels lean.

Overall, the June ISM report suggested that U.S. manufacturing remains in expansion mode but has shifted into a more measured pace following May’s surge. The combination of continued growth in new orders and production, moderating price pressures, and a slight improvement in employment should be viewed as constructive. While the slowdown in export demand bears watching, the report remains consistent with an economy that continues to grow at a moderate pace without showing signs of overheating.

U.S. construction spending was little changed in May, rising 0.1% to a seasonally adjusted annual rate of $2.210 trillion after an upwardly revised April reading, but remained 1.5% below its level from a year earlier. Through the first five months of 2026, construction spending totaled $858.4 billion, down 2.7% from the same period in 2025, highlighting the sector’s softer trend. Private construction was essentially flat, as a 0.3% increase in residential spending was offset by a 0.3% decline in nonresidential projects. Public construction provided the brightest spot, rising 0.5% on the month, led by 0.6% gains in both educational and highway construction. Overall, the report points to a construction sector that is stabilizing on a month-to-month basis but continues to face headwinds compared with a year ago.

The USD ends the day higher.

The U.S. dollar finished the session broadly stronger against the major currencies, posting gains against six of the seven most actively traded counterparts. The lone exception was the British pound, which managed to edge higher against the greenback.

Among the biggest movers, the Australian dollar fell 0.36% to 0.6894, while the euro was the weakest, declining 0.38% to 1.1378. The New Zealand dollar slipped 0.11% to 0.5670. The CHF and the CAD fell by 0.15% and 0.13% respectively.

Against the Japanese yen, USDJPY edged up 0.01% to 162.56, reflecting little net change on the day. However, the USDJPY did reach a new 40 year high of 162.83 before moving lower in the US session

The only currency to outperform the dollar was the British pound, with GBPUSD rising 0.13% to 1.3277, making sterling the strongest major currency versus the greenback.

Overall, the U.S. Dollar Index (DXY) gained 0.20% to 101.388, underscoring the dollar’s broad-based strength into the close.

US stocks are ending the day down with the Dow near unchanged, the S&P down -0.22% and the Nasdaq falling -0.66%. Meta announced early in the day that they would look to sell their excess AI capacity which helped Meta (is it a new business flow) and hurt some of the chip. AI infrastructure companies. The word excess supply is scary to a market that is being built on scarcity, not excess.

Meta rose 8.81%
Micron fell -10.57% and is now below the closing level from before the earnings release last week at $1048.50. The price close that $1032.28.
Intel fell -9.03%.
AMD fell -6.29%
Sandisk fell -10.62%
Broadcom fell 2.23%
Nebius fell -17.01%

in the US that market, yields moved higher with a steeper yield curve: