Euro Suffers When ECB Announces the First Rate Cut of the Cycle

The ECB is on the brink of announcing its first rate cut since March 2016 as the overall rhetoric from ECB officials leaves little doubt about next week’s rate decision, with even the most hawkish members of the Governing council acknowledging the need for rate cuts. This will be the ECB's first step to gradually unwind the aggressive tightening recorded during the 2022-2023 monetary policy cycle.

Focus for Global Trading on EMU and US Inflation Data Series

Later today, the focus for global trading is on the EMU and US inflation data series. EMU headline inflation is expected to slow from 0.6% M/M to 0.2% M/M. However, due to unfavourable base effects, the Y/Y measure likely reaccelerated to 2.5% from 2.4%. Core inflation is expected unchanged at 2.7%. In the US, the report on the April personal income and spending also contains the (core) PCE deflators.

Canadian Dollar Eyes Canadian GDP

The Canadian dollar is showing little movement on Friday, but that could change with the release of Canadian GDP and the US PCE Price index later today. USD/CAD is trading at 1.3660 in the European session, down 0.15% on the day.

U.S. Consumer Spending and Income Slow in April

The downward revision to Q1 consumer spending and lackluster start to Q2 add to the collection of evidence pointing to a slowing U.S. economy. Expectations that labor demand will continue to soften combined with decelerating wage growth should also exert further downward pressure. As such, consumer spending, while not grinding to a halt, is expected to continue losing some momentum as the year progresses.

Sunset Market Commentary

With the EMU May Flash CPI and the US (core) April PCE deflators on the agenda, global trading today again was fully focused on inflation and what it could mean for the start and/or the pace of monetary easing. EMU inflation surprised slightly to the upside. Headline CPI slowed to 0.2% M/M from 0.6% but base effects caused the Y/Y measure to reaccelerate from 2.4% to 2.6% (2.5% expected). Core inflation also unexpectedly rebounded from 2.7% to 2.9%.

Bank of Canada Set to Make the First Interest Rate Cut Next Week

All ducks appear to be in a row for the Bank of Canada to kick-start the policy easing cycle and lower the overnight rate by 25 basis points to 4.75% on Wednesday. The move follows cuts from the Swiss National Bank and the Riksbank (central bank of Sweden) in recent weeks and comes after the overnight rate was held at a restrictive 5% for about a year (the last rate hike was July 2023).

Week Ahead – ECB Rate Cut Might Get Eclipsed by BoC Surprise and NFP Report

The path by central banks to lower borrowing costs has been far from smooth, but it seems that the European Central Bank will be among the first to reach its desired destination. The ECB meets on Thursday for its June policy decision and is widely expected to cut its three main lending rates by 25 basis points. This would take the deposit rate down to 3.75%, widening the differential with the Fed funds rate, which currently stands at a range of 5.25%-5.50%.

Weekly Economic & Financial Commentary: Amid Higher Yields, Market Inflation Expectations Remain Stable

Since the start of the year, expectations for a later start to Fed easing in the wake of stubbornly-high inflation have pushed up benchmark Treasury yields. Notable in the advance of nominal yields has been relatively stable inflation expectations among market participants. Fairly steady breakeven rates suggest markets still view the Fed's commitment to 2% inflation as credible.

Forex and Cryptocurrency Forecast

Recall that Monday, 27 May was a holiday in the US. However, on Tuesday, dollar bulls took control, and the DXY Index started to rise, bolstered by a significant increase in the US Consumer Confidence Index (from 97.5 to 102.0 against a forecast of 96.0). Consequently, EUR/USD moved southward.

Focus on EMU Side Turns to Thursday's ECB Meeting

Focus on the EMU side turns to Thursday’s ECB meeting which will bring a first 25 bps rate cut to the deposit rate (3.75% from 4%). The bigger question remains whether the central bank commits to any guidance for the following meetings, something they refused to do so far.