Investors closely monitored the first US presidential debate between Democratic President Joe Biden and Republican rival Donald Trump, which took place early Friday in Asia, ahead of November's US election. Market odds for a Trump victory have narrowed slightly post-debate, potentially indicating upside risks to inflation. This scenario could lead to the Federal Reserve maintaining higher interest rates for a longer period, keeping US Treasury yields elevated and the US dollar strong, hence the uptick in yields and the dollar this morning.

At the same time, signs of the US economy slowing down are becoming more evident as recent macroeconomic data has consistently disappointed. Weaker consumer confidence, declining regional Fed PMI surveys, rising initial jobless claims, and pending home sales hitting a record low have pushed the US surprise index to its lowest level since mid-2022. Despite this, the US dollar index has continued its gradual rise, even though both nominal and real yields fell in June. The macroeconomic and yield-based support that has bolstered the US currency for most of this year is starting to diminish. However, political turmoil in Europe and currency weakness in Asia have enhanced the dollar’s appeal this month. For the dollar to begin losing some of its year-to-date gains, we would need to see a continuation of the global disinflation trend and a reduction in political tensions.

As the first round of the French election approaches this weekend, investors are shifting their attention to the Fed’s preferred inflation gauge today. The market consensus for core PCE is a 0.1% month-on-month increase and a decline in the annual inflation rate from 2.8% to 2.6%.