he week’s winner was the Swiss franc, boosted by the aftereffects of the Swiss National Bank’s dramatic hawkish surprise earlier in the month. Emerging market currencies were a mixed bunch, but for the most part they held up rather well in view of the massive sell-off we saw last week across the commodity complex.

The rally in risk assets last week suggests some easing on investor concerns about the inevitability of a recession, as central banks struggle to get inflation under control. Inflation data out on Thursday and Friday will be in focus on both sides of the Atlantic this week. The US May PCE data will likely confirm the earlier CPI report. More critical will be the Eurozone flash inflation report for June, the earliest read of inflation across all economic areas. A print above 4% in the core index would put further pressure on the ECB to accelerate its timetable for hikes, potentially buoying the common currency.

GBP

May inflation in the UK hit yet another multi-decade record, though the core index that strips out the more volatile food and energy components provided a tenuous silver lining, coming under expectations just below 6%. Last week’s business activity PMIs actually held up relatively well, with the composite index unchanged at 53.1 in June, albeit a drop in the business expectations component suggests a slowdown in the index is likely on the way.

Sterling continues to trade in line with risk assets, however, and benefitted from the recovery in world stock markets last week. This week we will pay close attention to consumer credit; our view that consumers will prove resilient to the squeeze in real incomes by drawing down on savings accumulated during the pandemic will be tested.

EUR

The PMIs of business activity for June were broadly disappointing, falling back significantly. The composite index slipped to 51.9, its lowest reading since February 2021. While they all remain at expansionary levels across the major economies of the Eurozone, the downward trend needs to be watched closely, as these indices remain the best leading indicator for European growth.

This week could be quite crucial for the euro. In addition to the June flash inflation report, the ECB’s annual forum on central banking takes place. Markets are expecting to see at least some details on the coming “anti fragmentation” tool, which was announced to be in the works following the bank’s recent ad-hoc meeting. Should this be deemed by investors as sufficient in order to close bond spreads in the bloc, then we could see some modest support for the euro this week.

USD

The dollar retreated modestly last week from near multi-year highs. Three factors appeared to weigh on the dollar. First, the retreat in US yields, as markets find it increasingly implausible to price in more hikes from the Fed in the near-term. Second, the general rebound in risk sentiment, which is now a clear negative for the safe-haven dollar.

Finally, trader positioning looks increasingly long dollars, as a near consensus seems to be established for a stronger greenback, which makes it difficult for it to rally further and turns mild setbacks into stop loss driven sell-offs. We think that a strong Eurozone inflation report on Thursday could lead to a strong countertrend sell off-in the dollar.