Sterling found support last week as UK inflation data surprised to the upside. April’s Consumer Price Index jumped to 3.5% year-on-year (vs. ~3.3% expected), its highest since early 2024. This unexpected rise, alongside signs of persistent food price pressures, led investors to scale back expectations of Bank of England rate cuts. Markets had been pricing in two quarter-point cuts by year-end, but now anticipate at most one, reflecting a more hawkish outlook. Against this backdrop, the pound strengthened, briefly touching its highest levels in over three years against the US dollar amid broad dollar softness early in the week.
In the coming week, the UK domestic calendar is relatively light, so GBP will likely take its cues from global developments. Key survey data, the May PMI (Purchasing Managers’ Index) readings for manufacturing and services are due and will provide insight into UK growth momentum in Q2. Barring any major surprises from data or BoE speakers, sterling’s direction may be driven by broader market sentiment – particularly risk appetite and moves in the US dollar – following last week’s inflation-driven repricing of BoE policy expectations.
The euro gained some ground early last week, supported by an improvement in risk sentiment on trade news. The US administration paused a threatened 50% tariff on European goods that was slated for 1 June, easing fears of an EU-US trade war. In reaction, the euro briefly climbed to its highest level against the dollar since late April. However, euro upside was limited as attention shifted to the European Central Bank’s policy outlook. Eurozone economic signals remained mixed – for instance, confidence surveys and other data point to subdued growth – and inflation is near the ECB’s 2% target, reinforcing expectations that the ECB will ease policy.
All eyes are on the ECB meeting this Thursday. A 25 bp rate cut (likely reducing the deposit rate from 2.25% to 2.00%) is widely expected as inflation trends lower and growth headwinds persist in the euro area. Notably, the flash Eurozone CPI for May is forecast to decline further – potentially dipping below 2% year-on-year – which would cement the case for a rate reduction. Markets will closely watch the ECB’s guidance at the meeting for clues on future policy moves, especially whether further easing is on the table. In the meantime, the euro’s performance may be somewhat cautious, with traders positioning ahead of the ECB decision and monitoring any commentary from officials. Any upside for EUR could be capped until there is clarity on the central bank’s stance after Thursday’s announcement.
The US dollar experienced choppy trading through last week, ultimately ending roughly flat against a basket of peers. Early in the week, the dollar softened as global risk appetite improved – catalyzed by the de-escalation of US-EU tariff tensions – which reduced demand for safe-haven assets. However, the greenback found support as the week progressed thanks to upbeat US economic data. Notably, the Conference Board’s consumer confidence index jumped to its highest level in over a year, signaling robust consumer sentiment. Other indicators, such as durable goods orders and a second estimate of Q1 GDP, also pointed to a resilient economy. These reports helped the dollar rebound from its lows by reinforcing the view that the Federal Reserve can maintain a wait-and-see stance (rather than rushing into rate cuts). U.S. Treasury yields ticked up in response, offering the dollar some additional support.
This week’s focus for the dollar will be a heavy slate of economic data, especially on the labor market. Key releases include the April JOLTS job openings and ADP employment report mid-week, but the spotlight will be on May’s non-farm payrolls (NFP) report due Friday. Investors will be watching whether job growth continues to cool modestly or surprises to the upside, as this could influence expectations for the Fed’s mid-June policy meeting. Additionally, ISM PMI surveys for May (manufacturing and services) are scheduled and will shed light on business conditions. With the Federal Reserve not meeting this week, the dollar’s near-term direction will hinge on how these data points shape the outlook for Fed policy. If the numbers signal continued economic strength (and persistent inflationary pressures), markets may push out bets on Fed rate cuts, which would support the USD. Conversely, any notably weak readings could revive speculation of Fed easing and weigh on the dollar. Overall, expect heightened USD volatility around the data releases as investors digest what the numbers mean for U.S. monetary policy.
The ECB is widely expected to cut interest rates by 0.25% at its June 5 meeting, which would lower the deposit rate from 2.25% to 2.00%. This would mark the seventh consecutive rate cut as the ECB responds to easing inflation (now hovering around its 2% target) and a softer economic backdrop. Markets are almost fully pricing in this cut, so the focus will be on the ECB’s statement and press conference for signals about future policy
The BoC is expected to hold its policy rate steady at 2.75% on June 4. After a series of rate reductions earlier in the year, the Bank paused at its last meeting in April. Inflation in Canada has moderated closer to the BoC’s comfort zone, and growth is steady but not robust, so policymakers are likely to stand pat this week to evaluate the impact of prior easing.
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*Interbank rates are correct at 7am on the date of publishing.
