Stock markets reacted to the strong US payroll report with a sell-off that accelerated into Friday's close. Yields rose as investors concluded that the Federal Reserve's rate-cutting cycle is over. A very pricey equity market (particularly in the US) has little room for error, sending investors for the exits. Stocks and bonds selling off in tandem means there is a dearth of safe havens, and for now, the US dollar is one of the few that fits the bill. This week's rankings leave little doubt: there is not a single major currency that did not retreat against the greenback.
In addition to the usual impact of the Iran war and fraying ceasefire headlines, this week investors will have to contend with some key macroeconomic reports and the ECB June meeting on Thursday. US May CPI inflation stands out among the latter. Markets expect another large increase in the headline rate as energy increases continue to filter through to the final consumer. The core subindex excluding food and energy will be the most important data point, as bond investors are already jittery from last week's strong labour market report. As for the ECB meeting, the first hike of the cycle has been carefully telegraphed by the institution, so the key will be whatever forward guidance can be extracted from the Council's communications and President Lagarde's conference.
GBP
A light week in terms of macroeconomic news out of the UK meant the focus for sterling traders was mostly elsewhere. We did see an MPC member (Greene) stating that she would consider voting for a hike at the next Bank of England meeting later this month.
A notable upward revision in the PMI business indices last week suggests that the initial confidence drop was overstated and that the UK economy is more resilient to the Middle East events than first feared. We look to this week's April monthly GDP data, released Friday, to validate this modestly optimistic view.
EUR
The Eurozone flash inflation report for May contained no nasty surprises, but it did confirm that headline inflation has moved decisively away from the ECB target, printing at 3.2%. Of course, this increase is driven primarily by the energy price spike, and it still remains to be seen whether there will be second-round effects. The lagging nature of Eurozone economic reports makes this even more difficult to assess than elsewhere.
The first quarter GDP report showed an unexpected contraction, but this was entirely due to quirks with Irish data. Excluding the small country, the Eurozone keeps growing at an annualised rate of just under 1%. This is the backdrop to Thursday's ECB meeting, when markets universally expect the first rate hike of the cycle.
USD
A very strong May payroll report from the US suggests the labour market there is reaccelerating and refutes the narrative that AI is already causing significant job losses. Rate markets are now assuming that the rate-cutting cycle is over, directly challenging new chair Warsh, who was appointed by Trump on the explicit assumption that he would cut rates.
With inflation and growth moving in opposite directions, the next Fed meeting should be particularly contentious. This week's inflation report will be key in assessing the extent to which energy price pressures are starting to spread to the rest of the economy.
Deep dives and expert insights:
- G10 currency market report - Get the latest analysis on major currencies.
- FX Monthly - June 2026: Iran, inflation and a managerial debut
- FX Update: Labour Leadership Crisis
