Week Ahead – Fed and BoJ Decide on Monetary Policy

With US inflation resuming its downtrend in April and the ISM manufacturing PMI for May disappointing, investors remained convinced that the Fed will begin lowering interest rates at some point this year. Currently, they are penciling in nearly two quarter-point reductions by December, assigning around an 80% probability for the first one to be delivered in September.

USD/JPY Steady Despite Soft Household Spending

The Japanese yen is calm on Friday. In the European session, USD/JPY is trading at 155.50, down 0.06% on the day at the time of writing.

Fed Set to Hold Rates as Inflation and Other Indicators Show Mixed Signals

Wednesday’s U.S. Consumer Price Index data and the Federal Reserve’s interest rate decision will be in focus after the Bank of Canada and European Central Bank cut rates the week before.

Weekly Economic & Financial Commentary: G7 Central Banks Ease into Summer with Rate Cuts

This week, the Bank of Canada lowered its policy rate by 25 bps and offered comments that leaned dovish in tone; we forecast another 25 bps cut in July. The European Central Bank (ECB) also delivered a 25 bps rate cut, a communicated and somewhat cautious stance for monetary policy going forward. We look for an ECB rate pause in July.

The Weekly Bottom Line: Labor Market Resilience Highlights Global Policy Rate Divergence

The economic calendar this week was backloaded, with Friday’s employment report for May dominating headlines. This week also saw two G7 central banks start cutting interest rates. Rate cuts by the European Central Bank and Bank of Canada raised market hopes that similar moves stateside were not far off. Treasury yields fell on the week, with the 10-Year yield down 9 basis-points (bps), while equities remained buoyant, with the S&P 500 rising to 1.4% as of the time of writing.

Strong US Labour Market Report Sends Yields Sharply Higher

In the US, May labour market data was profoundly hawkish, showing a labour market that is still tight - the opposite of what the Fed wants to see. Nonfarm payrolls increased 272k (cons.: +190k), average hourly earnings rose 0.4% m/m (prev.: 0.2%), and data showed that the labour force declined by 250k persons. The greenback gained (DXY +0.76%) and treasury yields rose (10Y +15bps) as markets returned to pricing in just a single December cut.

Strong US Jobs, European Elections Hammer EUR/USD

The post-jobs data rally in the US dollar pushed the USJDPY above the 157 level and the EURUSD off a cliff. The yen traders lack conviction that Friday’s Bank of Japan (BoJ) meeting could bring any hawkish shift after the latest growth numbers showed a contraction in the Q1. The BoJ could make minor adjustments to its JGB purchases to keep the yen’s weakness contained.

French Election Risk Likely to Keep Euro Under Pressure in the Build-up

The dollar rallied following US payrolls to a weekly close of EUR/USD 1.08 and ending the topside test of the 1.09 sideways range. The pair this morning sinks to the 1.0750 area after French president Macron conceded defeat in EU elections by calling snap elections at the end of this month. This election risk (strong showing of far right RN) is likely to keep the euro under pressure in the build-up.

Headwinds Knocked Down Bitcoin & Ethereum

Bitcoin failed its attempt to climb above $72K on Friday, pulling back below $70K. We haven’t yet seen an acceleration of the first cryptocurrency’s rise after breaking downward resistance. On the other hand, selling is also not gaining momentum. Clearly, the cryptocurrency market remains in a state of buying on downturns. Meanwhile, headwinds such as a rising dollar and tighter monetary policy are prolonging the consolidation.

Sunset Market Commentary

Elections for the European Parliament this time didn’t pass unnoticed on European markets. They clearly left investors with quite a degree of unease. The ‘gamble’ of French President Macron to call snap elections in an attempt to block the ascent of the far-right Rassemblement National (RN) illustrates the difficulties of center parties to politically stay in the driver’s seat and to execute their (reform) programs.