Israel’s decision to bomb Iran in order to stop its nuclear programme threw a lifeline to the dollar last week, which had been selling off amid a much lower than expected inflation print and worries about the US economy.
Monetary policy decisions will try to wrestle the spotlight away from Middle East tensions this week. The Federal Reserve meeting on Wednesday is undoubtedly the focus. No cut is expected, but markets are eager to gear the FOMC’s reaction to the slowdown in US data and, critically, the very positive inflation report for May, which shows no hint whatsoever of tariff-driven price increases. The next day we hear from the Bank of England, whose June meeting will come right after the key CPI report for May. Overshadowing it all will be potential surprises on the tariff front and Trump’s social media feed. All this may make for an unusually volatile week in currency markets.
GBP
Data flow out of the UK economy has been weaker of late, which may pressure the Bank of England into lowering interest rates sooner than they had perhaps intended. The labour market report for May last week showed clear signs of softening, experiencing the largest net loss of jobs since the pandemic and a sharp increase in jobless claims. The April monthly GDP report was also weaker than expected, with Britain’s economy contracting by 0.3% MoM. This effectively confirms suspicions that growth will slow markedly in Q2, as businesses and households both grapple with higher costs.
Against this backdrop, the Bank of England is expected to hold rates steady this week, but absent a strong inflation report the MPC may well signal that the next cut could come in the summer. This may come in the form of a tweak to the bank’s hawkish bias, or in the voting pattern, with the possibility that two or three officials vote for an immediate cut on Thursday. Weak data and the geopolitical conflict proved a bad combination for sterling last week, which gave back some of its gains from its recent scorching run.
EUR
Last week was very quiet in terms of news from the Eurozone, and this one will be no different. The euro initially soared in response to weak inflation in the US and some relatively hawkish comments from a handful of ECB officials, which seem to be suggesting that the bank is in no hurry to cut interest rates again. The start of the Israel-Iran conflict did, however, bring the euro back down to earth, and it is hard to see any catalysts that will help the common currency take the next leg up, at least this week.
Data on exports and industrial production is being distorted by the export surge to the US ahead of the tariffs, and the subsequent slump. This means that it will be a few weeks yet before we get a clear picture of their impact on the Eurozone economy. With no real major data out this week, attention will again be on speeches from a handful of ECB officials in the coming days, including President Lagarde on Thursday.
USD
The long awaited May inflation report out of the US showed no impact at all from Trump’s tariffs, and was in fact much lower than anyone had expected. The core subindex increased just 0.1% MoM, vs. expectations of +0.3%, a huge miss of a rarely seen size. Weekly jobless claims continue to inch upwards, contradicting the April payrolls report. Evidence is still very mixed, but on balance it seems to confirm that demand is slowing down, the labour market is loosening, and corporations are absorbing tariff costs rather than raising prices and risking market share.
The June Federal Reserve meeting this week will be interesting primarily to gauge the extent to which this data has impacted the FOMCs views on inflation, growth and potential interest rate cuts, of which two full ones are priced for this year by markets. As usual, the main focus for market participants will be on the bank’s updated ‘dot plot’. With inflation risks still prevalent, we may not see any change to the 2025 median dot, although one or two members may downgrade their view in favour of more aggressive cuts.