Sticky Inflation, Softening Growth, and an ECB Set to Move.
Summary
US PCE inflation, the Federal Reserve's preferred gauge, climbed to its highest reading since May 2023, all but ruling out a near-term rate cut
US Q1 GDP was revised down meaningfully, painting a softer growth picture than first reported
UK retail sales fell sharply in April and flash PMI data signalled the first private sector contraction in over a year, complicating the Bank of England's task
Markets are now pricing a near-certain ECB rate hike at its 11 June meeting, ahead of which Tuesday's flash eurozone inflation will set the tone
The picture has sharpened considerably over the past week. What had been a series of tentative signals about the direction of policy in each major economy has, with the latest data in hand, become something firmer. The Federal Reserve will not be cutting. The Bank of England is now navigating a genuinely difficult slowdown. The ECB looks set to deliver its first rate increase of the cycle. Friday's US payrolls report and Tuesday's eurozone inflation print are the two releases that matter most this week.
Sterling has steadied after a brutal stretch in mid-May, helped by Andy Burnham's recent softening of his tone on the bond market. The political risk premium has eased, though it has not gone away. The bigger concern for the pound now is the activity picture. UK retail sales fell at their fastest monthly pace in a year through April, and the flash composite PMI for May dropped into outright contraction, with services leading the decline. The Bank of England's task ahead of its 19 June meeting has just become more delicate. Inflation is cooling, but so is the economy, and the MPC will need to decide which trend it is more concerned about.
The dollar enters June supported by a Federal Reserve that is now plainly leaning hawkish. The Fed's preferred inflation gauge climbed to its highest level in three years in April, while consumer spending grew at only a fraction of that pace in real terms. The downward revision to first-quarter GDP added a further note of caution. Kevin Warsh inherits a central bank with limited room to ease and a real risk of having to lean further the other way. His first FOMC meeting comes on 16 and 17 June, but it is Friday's non-farm payrolls report that will shape sentiment between now and then.
The euro is the most likely mover this week. Tuesday's flash inflation reading for May lands ahead of the ECB's rate decision on 11 June, by which point markets are almost fully priced for a 25 basis point hike. Lagarde signalled at April's meeting that June would be the right moment for a reassessment, and the eurozone inflation profile since then has only strengthened the hawks' position. A softer May print would force markets to reconsider; a firmer one would seal the move.
Events to Watch This Week
Tuesday 2 June: Eurozone flash CPI (May)
Wednesday 3 June: US ISM Services PMI (May)
Friday 5 June: US non-farm payrolls and unemployment rate (May)
Tuesday's eurozone inflation print and Friday's US payrolls report are the week's two most consequential releases for currency markets, with the potential to shift sentiment sharply ahead of the major central bank decisions later in June. Speak to the Orbis dealing team to ensure your upcoming transfers are protected.
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