Last week saw the FX markets set up as if a test of the downside in GBPUSD and EURUSD was coming, but that petered out, and from a fundamental perspective, it’s difficult to see why. There was some weakness in a few US survey releases, but overall, the strength exhibited in the US labour market data should have overridden that.

Meanwhile, Euroland March CPI (Consumer Price Inflation) data was weaker than expected, increasing the case for a reduction in ECB (European Central Bank) interest rates. UK inflation expectations were also weaker than expected, including wage inflation. This is something that we’ve been hearing from clients for around the past 6 months, where businesses feel unable to pass on cost increases through the price chain, and so are cutting back on pay awards.

The US March employment report on Friday recorded another significantly-above-consensus outturn for US non-farm payrolls. There followed a modest dollar rally, but nothing that really reflected a significant change in mood from the FX markets or indicated that a break of tight ranges, that have held since the turn of the year, was imminent.

This week sees the US March consumer price inflation figures released on Wednesday. If there is another overshoot versus the consensus forecast and a larger rebound versus February’s outturn, will that dent US interest rate cut expectations further? I suspect that is the risk, and this could add additional support to the USD, in my opinion.

Also from the US this week is the March FOMC (Federal Open Market Committee) meeting minutes, and March monthly Budget statement due for release ahead of the March producer prices data and University of Michigan consumer sentiment reading (provisional April). I doubt any of these will intensify expectations of a June interest rate reduction, and so the USD might get further support post the CPI release, in my opinion.

From the other side of the Atlantic, the ECB Governing Council meeting on Thursday is likely to provide some sharp contrast. There have been some signs that the worst is behind the Euroland economy, and activity might even turn positive in Q1, but the weakness of output and reduction in inflation pressure is likely to still build the case for a June rate cut, in my view.

The fact that some of the Euroland data and surveys are improving could offer the EUR a little support, but probably more so against the GBP than the USD. In the UK, the only data of significance is Friday’s monthly activity data release. Services output is expected to rise very modestly, but could there be some downside risks because of ongoing protests in central London, and other major urban centres? Any weakness in the UK economy could mean the GBP underperforms the rest of the major currencies, but we’ll have to wait and see what comes to pass on Friday.

As far as other central banks are concerned, this week sees the likes of the Reserve Bank of New Zealand, Bank of Thailand, Bank of Canada and central bank of Peru all decide on interest rates.

Growth remains weak in a lot of these economies, but only one central bank, the Bank of Thailand, is expected to cut interest rates. The weakening of domestic economic conditions in a number of these countries needs to be watched more closely than it currently is, in my view.

If domestic inflationary pressures continue to recede and there is a weakening of global inflation pressures driven by geopolitical pressures, then central banks could be taken by surprise and look to be behind the curve in terms of their monetary policy stance. For FX markets, any delays to US interest rate cuts could be dollar positive, but equally any weakness to growth for secondary/emerging market economies could be detrimental to those currencies also.