Payrolls Surprise, Eurozone Inflation Climbs, & ECB Takes Centre Stage.
Summary
US non-farm payrolls surprised firmly to the upside in May, more than doubling the consensus forecast and reinforcing the case for the Federal Reserve to hold rates steady
Eurozone headline inflation rose again in May to its highest reading since September 2023, with services and core measures both pushing higher
The ECB delivers its rate decision on Thursday, with markets all but fully priced for a 25 basis point increase, the first of the cycle
US CPI on Wednesday is the other major release of the week, the last meaningful inflation read before the Federal Reserve's 16 to 17 June meeting
The week ahead is dominated by the European Central Bank, which is poised to break a long period of stasis with its first rate increase in years. Friday's US payrolls report provided the backdrop, beating expectations comfortably and supporting a dollar that had begun the previous week on the defensive. Eurozone inflation continued to climb in May, leaving the case for ECB tightening intact. Sterling, by contrast, has been relatively quiet, with the bigger UK risk events still ahead later in June.
The dollar enters the week supported by a US labour market that is proving more resilient than analysts had expected. Friday's payrolls report showed hiring well above consensus, with upward revisions to the prior two months adding to the picture of strength. The Federal Reserve's preferred inflation gauge has already confirmed an environment in which cuts are off the table; a firm jobs print now removes much of what little urgency remained. Wednesday's CPI release is the next test. Headline US inflation has been climbing on energy, and another firm reading would harden the dollar's recent gains. Kevin Warsh's first FOMC meeting follows next week, and the data flow between now and then will shape the tone he sets.
The euro is the focus of the week. Last Tuesday's flash inflation data confirmed what markets had already begun to price: euro area headline inflation rose to its highest level since September 2023, with services prices accelerating sharply and the core rate also pushing higher. The Governing Council meets on Thursday, and a 25 basis point hike to the deposit facility rate is widely expected. President Lagarde flagged at the April meeting that June would be the moment for a reassessment, and the data since then has only strengthened the hawks' position. New staff projections will accompany the decision. A move accompanied by guidance suggesting further tightening could lie ahead would lift the euro; a more cautious framing could see it give back recent gains.
Sterling has steadied as the worst of the May political turmoil has eased, though the picture remains fragile. The Makerfield by-election on 18 June, in which Andy Burnham seeks to return to Parliament, is the next major domestic risk event for the pound. Should he win, a leadership challenge to Starmer becomes possible, and the fiscal risk premium that briefly pushed long-dated gilt yields to multi-decade highs in mid-May could rebuild quickly. Friday brings monthly GDP and a clutch of activity data from the ONS, the first major UK releases of the month and the first test of whether the slowdown signalled by recent retail sales and PMI prints is gathering pace.
Events to Watch This Week:
Wednesday 10 June: US CPI (May)
Thursday 11 June: ECB rate decision and press conference
Friday 12 June: UK monthly GDP, trade balance and industrial production
Wednesday's US inflation print and Thursday's ECB decision are the week's two pivotal events for currency markets. Speak to the Orbis dealing team ahead of both releases to ensure your upcoming transfers are protected.
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