Eurozone expects first interest rate cuts on Thursday
This week should see the European Central Bank (ECB) cut interest rates by 25 basis points, and this is already priced into market thinking. The chances of another rate cut in July have faded, but the ECB could hint at more loosening to come, given the ongoing weakness in the Eurozone economy.
So, the focus for markets is unlikely to be on the ECB’s decision itself, but on the press conference. How worried is the central bank about the rebound in inflation numbers seen in May? The EUR could still come under pressure, with any indications from the ECB of further near-term loosening likely to solidify expectations of another cut in September (or earlier), in my view.
GBP and EUR face robust USD
Last week saw the pound and euro fail to capitalise on efforts to push higher against the USD, with GBPUSD again tumbling towards the $1.28 region and EURUSD drifting down towards $1.09. This week might see more of the same.
A lack of volatility in FX markets remains a key theme, which is surprising given the extent of geopolitical and economic risk, in my opinion. As we head into summer, there are risks of renewed pressure on the pound and euro against the US dollar, with the prospects of monetary policy divergence and additional political risks intensifying. This week there are few risks from UK or Eurozone data, leaving the focus very much on the US.
US jobs data may confirm slowdown in employment
April’s US non-farm payrolls figure reported a slowdown in employment growth, with the labour market appearing to soften across the board. Are US employers becoming more cautious because of emerging pressures on global and domestic economic demand? Friday’s May release might confirm this, but I think there is more risk of a reacceleration in employment growth from the US. If so, then the USD might get a renewed boost against other major currencies, as the prospect of a cut in US interest rates recedes further.
Other figures to keep an eye on are the Job Openings and Labour Turnover Survey (JOLTS) data for April, released on Wednesday, and May average earnings and unemployment figures released alongside the payrolls data on Friday, in my view.
Bank of Canada and National Bank of Poland to sit on their hands
Neither the Bank of Canada (BoC) nor the National Bank of Poland (NBP) are expected to lower interest rates. However, both economies are experiencing signs of weaker inflation and economic activity that, on their own, would support the case for monetary loosening.
Concerns over geopolitical risks, divergence from the Federal Reserve and signs of inflation rates turning around in other economies ought to keep both central banks from enacting additional monetary easing. But they may shed more detail of when, or if, either would consider loosening policy later in the year.
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