As financial markets in the United States and the United Kingdom observe a holiday today, trading volumes are expected to be lighter, which may contribute to reduced volatility at the beginning of the week. However, key economic data releases later in the week are likely to drive significant market movements.
USD
The U.S. inflation outlook is in sharp focus this week, with the Core PCE Price Index, the Federal Reserve’s preferred inflation gauge, due on Friday. Last week saw a decline in Fed rate cut expectations, which boosted the dollar. The dollar index surged mid-week, rising above 105.1 before easing to 104.7 on Friday. U.S. treasury yields also gained strength, with the 10-year bond yielding approximately 4.47%.
The Fed kept interest rates unchanged at its latest policy meeting, within a target range of 5.25% to 5.50%, as expected. Chair Jerome Powell emphasized that, while future rate hikes are unlikely, inflation has not cooled sufficiently to justify rate cuts. The minutes from the latest FOMC meeting highlighted that inflationary pressures remain high, and that interest rates will need to stay elevated for longer to achieve sufficient disinflation.
Market speculation about the Fed’s pivot to a more dovish policy has been intense for months. The odds of a rate cut in September dropped from 70% to 50% following hawkish comments from several Fed officials, who have stressed the need for more evidence of cooling inflation before a policy shift can be considered. Economic indicators released on Thursday were optimistic, with Flash Manufacturing PMI rising to 50.9 and Flash Services PMI climbing to 54.8, indicating robust economic activity.
This week, all eyes will be on the preliminary GDP data for Q1, expected to show a 1.3% expansion, and the Core PCE Price Index on Friday, forecasted to drop to 0.2% in April from 0.3% in March. If these expectations are met, it could indicate easing inflationary pressures, potentially putting downward pressure on the dollar.
EUR
The EUR/USD rate fell to 1.081 last week as the dollar strengthened but recovered slightly to close at 1.084 on Friday. The ECB kept its interest rates unchanged at 4.50% but hinted at a dovish shift in the future. The ECB has revised its inflation projections down, and President Christine Lagarde has pointed to a possible rate cut in June, supported by Vice President Luis de Guindos’ confidence that inflation will meet the ECB’s target next year.
Economic activity data for the Eurozone were mixed, with Flash Manufacturing PMI rising to 47.4 but remaining in contraction territory, and Flash Services PMI at 53.3, below expectations. The Eurozone economy grew by 0.3% in Q1, in line with preliminary estimates. Euro area inflation remained steady at 2.4% in April, with core CPI dropping to 2.7%.
The Euro remains under pressure from expectations of ECB rate cuts, especially as the Fed is not likely to cut rates before July, putting the Euro at a disadvantage against the dollar.
GBP
The British pound gained strength against the dollar last week, rising to 1.273. Prime Minister Rishi Sunak’s announcement of a national election on July 4 raised concerns about political instability, causing initial weakness in the sterling. However, the currency regained strength as markets digested the news.
UK economic data were mixed, with Flash Manufacturing PMI showing expansion at 51.3, while Flash Services PMI fell to 52.9, indicating slower growth. The inflation report for April showed headline inflation easing to 2.3%, exceeding expectations of a more significant drop. The BOE kept interest rates steady at 5.25% but showed signs of preparing for a dovish pivot.
The British economy narrowly avoided recession in Q1, with monthly GDP data for February showing a 0.1% expansion. The fragility of the UK economy may force the BOE to pivot to a more dovish policy sooner than anticipated.
JPY
The yen’s weakness remains a concern for Japanese officials, who have been warning against speculative short selling. The USD/JPY rose above 157 last week, driven by a stronger dollar. Intervention concerns remain high, with Japanese authorities potentially ready to support the currency if necessary.
The BOJ kept all policy settings unchanged, despite recent yen weakness. Japan’s economy showed signs of recession in Q1, shrinking by 0.5%. Inflation continues to decline, with headline inflation dropping to 2.2% in April. Flash Manufacturing PMI showed the sector moving out of contractionary territory, with a print of 50.5.
Gold
Gold prices hit an all-time high of $2,450 per ounce last week amid uncertainty over the Fed rate outlook, before declining to $2,330 per ounce on Friday. The fluctuations in Fed rate cut expectations have caused volatility in gold prices, which are also influenced by geopolitical tensions in the Middle East, increasing demand for safe-haven assets.
Oil
Oil prices were highly volatile last week, with WTI prices fluctuating between $76.7 and $78.1 per barrel. The anticipation of the OPEC meeting on June 2nd and mixed signals on extending voluntary production cuts have caused uncertainty. U.S. crude oil inventories showed a larger-than-expected build, putting pressure on prices.
Cryptocurrencies
Bitcoin and Ethereum experienced significant movements last week. Bitcoin dropped from $72,000 to $69,000, while Ethereum surged to $3,900 after the SEC approved several spot Ethereum ETFs. Cryptocurrencies remain sensitive to central bank interest rates, with high rates putting pressure on these risk assets. Geopolitical tensions and hawkish Fedspeak have also contributed to market volatility.
As the week unfolds, markets will closely monitor key economic data and geopolitical developments, with the Core PCE Price Index on Friday being a crucial indicator for future Fed policy direction.
