s expected, most of the action took place on Friday afternoon, as markers reacted to the softer than expected numbers posted by the US labor market in May. The net creation of 138,000 jobs, while a decent performance, was below previous month’s levels as well as expectations, and traders took the opportunity to send the greenback lower. The Dollar ended the week modestly lower against most G10 currencies save for the commodity-sensitive ones: the Canadian Dollar, the Australian Dollar and the Norwegian Kroner.

The relative quiet of the past few weeks should give way to some serious volatility this week. Thursday is set to be a particularly critical day. In the afternoon, the ECB will make its monetary decision followed by President Draghi’s press conference that will provide key insight on the debate within the Council about the timing for any exit from QE as well as a hike in rates. That same day the UK goes to the polls in a race that looked like a foregone conclusion a few weeks back but has tightened considerably. FInally, that same day former FBI director testifies in from of the US Senate.

Major currencies in detail

GBP

Second tier data out of the UK were roundly ignored by markets, which remain focused on the 8th June general election.

Polls continued to reflect a much tighter race than the Tories have been expecting, with the average calling for a mid-to-high single digits lead for Theresa May. Our base case is still that the Conservatives will eke out a victory, and the first-past-the-post electoral system will magnify the thin margins into a comfortable parliamentary majority. Betting markets and option traders both price in a 20% chance of either a hung parliament or a Labor victory. Given the close polls, these are entirely reasonable levels. However, in the most likely case of a Conservative victory, we are likely to see a moderate relief rally in UK assets and Sterling should be no exception.

EUR

A rather large downside surprise in May’s flash inflation across the Eurozone knocked the Euro down earlier in the week. The pullback in core inflation, from 1.2% all the way back to 0.9%, was particularly relevant as it calls into question the ECB’s forecast for a steady increase in inflation back towards its targets.

The Euro did manage to more than make up its losses after the soft US employment report out of the US. However, we think that this release materially lowers the chances that the ECB will deliver a hawkish surprise on Thursday. We think the ECB will try hard not to disrupt markets and deliver a statement that changes forward guidance. However, we think there is a non-negligible risk of an unchanged statement which would weigh heavily on the common currency.

USD

The softer-than-expected payrolls report hurt the US Dollar, but in the end markets are still pricing in a near certainty of a June hike from the Federal Reserve and the damage was contained. A weakish headline, with just 138,000 jobs created in May vs. expectations for 180,000, and the fact that wages continue to increase at a modest 2.5% annual rate, was somewhat of a disappointment.

Former FBI director Comey’s testimony to the Senate takes an unusually high profile for markets this week. With fiscal stimulus and infrastructure spending knocked off the agenda for now, Comey’s revelations, if any, will provide key guidance on the Administration’s ability to bring its focus back to the domestic agenda. Expect FX traders to be listening closely to his testimony.