The week ahead is disrupted by holidays, with the US closed today for Memorial Day and the UK closed on Thursday and Friday to celebrate the Queen’s Platinum Jubilee.
There are also half-term school holidays in the UK which tends to diminish liquidity, and month-end tomorrow, which should, when combined, add to volatility. Despite the holiday interrupted week, there is plenty to occupy the markets starting this morning with Germany’s Inflation data, followed on Wednesday with the S&P Purchasing Managers Indexes. However, the key data will be released at the back end of the week with the release of the US employment data. As we are becoming accustomed to domestic politics in the UK will continue to dominate the headlines with Boris Johnson looking increasingly vulnerable.
Last week saw the dollar continue to fall for the second week running, following six consecutive weeks of gains. The primary beneficiary was the euro which gained nearly two euro cents over the last seven days. The euro was supported by the increasingly hawkish noises coming from council members of the European Central Bank, who have been talking more frequently about the possibility of a rise in euro interest rates in the summer. There is some scepticism over whether they will be as hawkish as they sound, but we will see in the fullness of time. Still, with the first sounds of hesitation from the US policymakers at the Federal Reserve being heard, it is, for the time being, enough to underpin the single currency. Sterling mainly benefitted from the dollar’s weakness, finishing better on the week whilst trading sideways against the euro to end broadly unchanged.
GBP
As we said previously, with a holiday-shortened week ahead due to the celebrations in the UK for the Queen’s Platinum Jubilee and many traders off to share school half terms with their children, sterling could be in for a relatively quiet time. Sterling ended the week strongly as traders digested Rishi Sunak’s financial statement and calculated the effects of his generosity. It gained ground, particularly on the dollar and has opened this week in a suitable celebratory mood ahead of the week’s festivities. The conclusion seems to be that the giveaways won’t add materially to the inflation outlook in the UK and may actually give the Bank of England a little more room to manoeuvre and move interest rates upwards. Having suffered from fears that the Bank was becoming dovish, sterling recouped some of its losses and enters the new week looking a bit more composed. There is a dearth of economic data this week, with the only noteworthy release being S&P’s final take on May’s Purchasing Managers Index for the Manufacturing sector on Wednesday. The only spokesperson from the Bank of England scheduled to speak this week is Andrew Hauser on Wednesday.
EUR
The euro had a good week gaining on both the dollar and sterling as council members of the European Central Bank revealed their hawkish tendencies just as the Federal Reserve started to float the idea of a pause in their proposed interest rate hikes in September. Whether the ECB actually follow through on their proposed hike, only time will tell, but in the meantime, it was enough to encourage some short-covering and, latterly, some fresh buying of the single currency. With holidays and month-end distorting the market, it will be hard to judge the conviction of this new buying, but at least the council members of the ECB who had been worried by the low level of the euro will now be in a happier place. In contrast to the UK, the eurozone has a busy calendar of data starting this morning with reports on Business, Economic and Consumer Confidence for the bloc and German Inflation. Tomorrow Germany reports its unemployment level whilst the first readings of May’s Consumer Price Index for the eurozone are released by Eurostat. On Wednesday, Markit releases its Purchasing Managers Index for the EU and Eurostat its Unemployment level. Finally, on Friday, Markit will publish its final take on May’s Purchasing Managers Indexes alongside Retail Sales for the EU. Christine Lagarde has an opportunity to air her newfound hawkish credentials when she delivers a speech on Wednesday, and whether Fabio Panetta and Phillip Lane are also converted may become apparent as they also speak in the afternoon.
USD
The US markets are closed today for Memorial Day, but after a strong close from the stock markets and a reassessment of risk, the dollar could come under renewed selling pressure. The inflation data released on Friday did indeed show a softening and possible plateauing of the rise in prices feeding into the narrative that the Federal Reserve may well take time out from hiking rates after their next two rises. This week as always, in the first week of the month, the US Labor Department will publish their full employment report on Friday, which is expected to continue to be good, with the major restraint being worker supply, with nearly two vacancies for each job. With a limited workforce chasing jobs, the upward wage pressure is likely to continue with its associated inflationary impact. Before they are published, ADP releases their private-sector employment report on Wednesday, and on Thursday, the weekly jobless total is posted. Consumer Confidence for May will be published tomorrow, and as elsewhere, Purchasing Managers Indexes are scheduled for release on Wednesday and Friday. There are plenty of policymakers from the Fed speaking this week, and the markets will be listening to see if more talk of a late-summer pause in hiking rates is mentioned. The Fedspeak starts this afternoon with Christopher Waller, followed by John Williams and James Bullard on Wednesday. Thursday, soon to be appointed, Lorie Logan and Loretta Mester step up to the microphone, and Lael Brainard speaks on Friday.
Finally, we hope all our readers enjoy the week’s festivities and will join us in raising a glass of something bubbly to Her Majesty Queen Elizabeth II on the wonderful occasion of her Diamond Jubilee! God Save the Queen!