Markets Weigh Geopolitics and Look Ahead to US Inflation.
The foreign exchange market is starting the new week by assessing the results of the French legislative elections and digesting last week's critical US employment data. The US jobs report came in stronger than anticipated, reinforcing the case for the Federal Reserve to remain patient on interest rates and providing broad support for the US Dollar. This week, the focus will turn back to inflation, with a key US report due that could influence the Fed's outlook, while political headlines from Europe will continue to shape sentiment.
The Pound Sterling continues to be influenced by the outlook for UK interest rates, with markets still anticipating a potential Bank of England rate cut in August. However, with the domestic economic calendar relatively sparse this week, the Pound will likely be driven more by external factors. This includes the general direction of the US Dollar and any shifts in market risk appetite stemming from political developments across Europe.
The US Dollar begins the week on solid footing, buoyed by last week's robust labour market data. The strong jobs report has solidified the narrative of US economic resilience, giving the Federal Reserve ample reason to maintain its cautious stance. The key event for the Dollar this week will be the latest Consumer Price Index (CPI) inflation reading on Thursday. A soft report could revive hopes for a rate cut later this year, while a high number would further cement the "higher for longer" view.
The Euro is in the spotlight following the conclusion of the French elections. While the immediate market reaction is still being processed, the ongoing political situation will remain a key driver of sentiment for the single currency. Traders will be looking to see if the outcome reduces or prolongs the recent period of uncertainty. Beyond politics, the focus will be on economic sentiment data from Germany to gauge the health of the bloc's largest economy.
Events to Watch This Week:
⦁ Tuesday: German ZEW Economic Sentiment
⦁ Wednesday: Bank of Canada Interest Rate Decision
⦁ Thursday: US CPI Inflation Report & US Initial Jobless Claims
⦁ Friday: Consumer Sentiment (Preliminary for July)
The market narrative this week will be a blend of politics and economics. While the political situation in Europe will be a key determinant of risk sentiment, the US inflation data on Thursday holds the most potential to cause significant market-wide volatility. A surprise in that report could easily redefine the outlook for the US Dollar and the Federal Reserve's next move.
