News & analysis


The broad dollar found itself trading under pressure on Friday after US PCE slowed and personal income and spending data pointed towards the soft growth momentum seen in Q1 being sustained into Q2. For the moment, this is failing to weigh heavily on Fed rate cut expectations, not least given recent commentary that steered strongly in favour of the FOMC maintaining rates at current levels until September, unless there are signs of a slowdown in the labour market. As such, the key event of this week is likely to be a US jobs report on Friday, where markets expect a nonfarm payrolls print of 190k. An undershoot would likely put a July rate cut back in play for markets, weighing heavily on the greenback. A beat, in contrast, would make it hard to turn too bearish on the US economy, with a tight labour market suggestive that the current spending weakness is temporary rather than the start of anything more sinister. Given this, we see risks to the dollar as too sided this week, albeit we think it is a little too early to turn negative on the greenback in advance of Friday’s critical data.

While US jobs are set to be the week’s main event, elections are a focus at the start of the week. Results in South Africa over the weekend confirmed that the ANC has lost its majority, and will need to form a coalition with at least one other party. With significant uncertainty around what form this coalition might take, and some notable downside risks, the rand continues to trade under pressure to start the week. That said, South Africa is not the only election story in town, with Mexico electing its first female President over the weekend and Indian elections taking place today. Even so, with continuity administrations likely in both cases, this should keep currency volatility to a minimum.


Thursday’s ECB meeting is clearly the focus for euro traders this week. Despite Friday’s inflation overshoot, we still expect the ECB to deliver a rate cut, taking the deposit rate to 3.75%. Commentary from both the hawks and the doves has done little to suggest a change in thinking, with both groups continuing to suggest a rate cut is coming. As such, an about face at this juncture would do too much damage to the Bank’s credibility for the Governing Council to deliver a surprise hold. What last week’s data does do though, is kill off any prospect of back-to-back rate cuts, which should see short term rate expectations remain well anchored this week. It does not mean that traders can simply overlook this week’s meeting though. Instead, there will be a significant focus on Bank staff projections, with these key to steering markets on the likely ECB rate path post July. These are likely to show better growth and more inflation, we think indicating a preference for cutting rates once per quarter. A steer in this direction should see the euro soften modestly, with this easing pace marginally faster than markets expect at present. That said, a hint towards slower, more irregular rate cuts remains a possibility, an outcome that although not our base case, does open a path towards modest upside for the euro this week.


One election that is doing little for FX markets is the ongoing campaign in the UK. Very limited domestic data and no BoE commentary saw the pound left in limbo once again at the end of last week. With little movement in the polls so far, subdued sterling price action is likely to continue as a theme too this week. The next notable UK data release on the horizon comes on Thursday with the publication of the May Decision Maker Panel, with sterling price action likely to be dictated by events elsewhere in the early part of the week.


With Friday’s GDP reading the last major data release to be published before the BoC meets this week, we doubt the Governing Council has seen anything since the April policy meeting that should keep them from cutting rates on Wednesday. Significantly, at 1.7% QoQ annualised, the Q1 GDP data not only undershot market expectations that looked for a 2.2% print, but it also fell below the BoC’s 2.5% estimated neutral rate of growth, suggesting a continued negative expansion in the output gap. Not only should this weigh on inflation going forwards, but all major inflation readings now back below the 3% level that marks the top of the BoC’s tolerance band. Moreover, with policymakers having seen disinflation progress sustained over recent releases, we think the Governing Council’s conditions to begin policy easing have now been met. As such, we fully expect the BoC set to become the third G10 central bank to start easing rates this week. That being said, despite the dovish implications from Friday’s data for the BoC, USDCAD saw this more than offset by the impact of US PCE data and subsequent risk rally across markets, with the pair falling 0.4% into the weekend. We expect that this week the readthrough for CAD will be clearer, however, with a climb back to 1.37 for the pair well within range if the BoC meets our expectations.



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