GBP

The most important data point out last week in the UK, April monthly GDP growth, was fairly encouraging, bringing the 3-month running rate from -1.5% to +1.5% in a sign of the positive impact the reopening is having. The event was largely priced in by the market, and sterling did not move much against any of its G10 peers last week. This week’s employment report on Tuesday will be blurred by the various support schemes and we do not expect it to move markets. Inflation out Wednesday may be a different matter. Inflation surprises are becoming the norm everywhere, and if the UK follows suit, we could hear increasing market chatter about the Bank of England tightening earlier than expected, which would buoy the pound.

EUR

As we expected, the ECB made no changes to its policy settings and President Lagarde sounded alternatively noncommittal and modestly dovish. However, there were strong positive revisions to the 2021 forecasts for inflation and growth. Crucially, the ECB now expects the Eurozone economy to reach the pre-pandemic level by the end of 2021. The ECB also sees inflationary pressures as transitory. The pace of PEPP purchases was also left unchanged. All in all, a dovish outcome. We expect the debate between hawks and doves to pick up strength and become significant in the September meeting. It is likely that the inflation numbers between now and then will surprise to the upside.

USD

The market reaction to the huge upward surprise in the May inflation report left us somewhat befuddled. We have no choice but to resort to the unsatisfactory explanation of “position adjustment” to explain it. Yields dropped massively in spite of an inflation rate that is running at a 5% annual rate, with the perhaps more meaningful core rate running at 3.8% for the year and a whopping 8.3% annualized rate over the last three months. The dollar rallied modestly on these developments, as traders keep their powder dry for this week’s key Federal Reserve meeting. While the rhetoric from Chair Powell will quite likely remain dovish and dismissive of the inflation surprises, we expect to see some move in the “dot plot” where each member puts down his or her best guess as to the level of rates in each of the next three years. We think there may be a majority that expects a hike no later than 2023, and see potential for the US treasury market to give up all of last week’s gains and then some, with a somewhat unpredictable effect on the dollar.

CHF

The Swiss franc soared last week, boosted by a significant decline in the US yields. The 10-year yield dropped to as low as 1.43% at one point, enabling the Swiss currency to rise to the strongest level since February against the euro.

This week the attention turns to the Swiss National Bank. We are unlikely to see major changes in the central bank assessment, but an upward revision to its inflation forecast seems quite likely, particularly considering the increase in oil prices. Judging by how sensitive the Swiss currency is to shifts in the US yields, the franc could also take cues from the Fed meeting, which will be at the center of investors’ attention on Wednesday.