The spotlight this week shifts to UK fiscal plans and economic data. Chancellor Reeves will deliver the Comprehensive Spending Review on Wednesday, outlining departmental budgets for the next three years and investment plans for four years beyond. While the review will highlight the government’s priorities (with significant front-loaded increases in infrastructure spending) it is largely constrained by “non-negotiable” fiscal rules limiting day-to-day expenditure growth to around 1.2% per year. Currency markets will watch for any surprises, though the impact may be muted as the exercise largely allocates previously announced funding. More immediate for sterling will be Tuesday’s labor market report and Thursday’s April GDP. These releases are expected to confirm a soft start to Q2: April GDP is forecast to contract by ~0.2% after a solid Q1, with declines in services and manufacturing output. Despite the weak start, even flat activity in May and June would keep Q2 GDP marginally positive (well below Q1’s +0.7%). The jobs data are likewise projected to show cooling momentum – employment growth in the three months to April likely slowed, pushing the unemployment rate up to ~4.7%, while underlying wage growth eases to around 5.4% (ex-bonuses). Signs of a loosening labor market and weaker output could reinforce expectations that the BoE will eventually cut rates, limiting GBP upside. However, any upside surprises (e.g. resilience in hiring or output) might temper dovish bets and support the pound.
Sterling benefited from improved risk sentiment and dollar weakness. Trade tensions flared early in the week as the U.S. doubled tariffs on steel and aluminium (though the UK was exempt), but an agreement between Presidents Trump and Xi to resume talks helped ease fears. Meanwhile, soft U.S. business surveys contrasted with stronger-than-expected U.S. employment data – nonfarm payrolls rose by 139k in May (slightly below April’s revised 147k) with solid wage growth. Global yields and rate expectations seesawed on these mixed signals, but the Federal Reserve maintained a cautious “wait-and-see” stance. In the UK, Bank of England Governor Bailey’s testimony (with fellow MPC members) underscored divergent views on further easing. A rate cut at the 19 June policy meeting is seen as unlikely, with markets pricing only ~60% odds of an August cut. Against this backdrop, GBP/USD climbed back above $1.35, reflecting both the BoE’s steady policy outlook and broad dollar softness.
The ECB cut interest rates by 25 basis points to 2.0%, continuing its accommodative push, but hinted that a pause could come as soon as July. This message – that the ECB is nearing the end of its rate-cut cycle – helped limit the euro’s downside. In fact, the euro’s reaction was relatively muted, as markets had partly anticipated the move and were encouraged by the prospect of no further significant easing. Elsewhere, Europe’s exposure to global trade meant the EU was on alert over U.S. tariff actions, but relief came when the U.S. excluded EU allies like the UK from the metal tariff hikes. Eurozone-specific data were sparse last week, and investor attention remained on the central bank: with the ECB’s rate decision out of the way, euro traders largely tracked broader dollar moves and risk sentiment. The softer U.S. dollar late in the week lent modest support to EUR/USD. Overall, the euro held in a steady range, reflecting a balance between a dovish ECB action and the reassurance that policy may not ease much further.
With the ECB policy meeting out of the way, focus turns to economic releases and any central bank speak. Key data toward week’s end are expected to underscore a challenging start to Q2 for the Eurozone economy. Industrial production for April (due Friday) is forecast to decline on the month, highlighting continued weakness in the manufacturing sector. Additionally, the ECB’s composite wage tracker (updated on Wednesday) will be scrutinized after earlier indications that wage growth is moderating into 2025. Softening wage pressures could reinforce the ECB’s cautious stance on further stimulus. Throughout the week, several ECB officials are scheduled to speak at events – their comments will be watched for confirmation that most policymakers favor holding fire on additional rate cuts. If data come in weaker than expected, it could revive concerns about the Eurozone’s recovery and weigh on the euro. However, evidence that inflation or wages are cooling might also be taken positively by markets insofar as it reduces the need for more ECB easing. Barring any major surprises, EUR/USD will likely take cues from the U.S. inflation data mid-week and overall risk appetite, as traders position ahead of the Fed’s meeting in the following week.
The dollar’s trajectory was choppy amid cross-currents in data and policy signals. Early in the week, escalating trade tensions threatened to dampen global sentiment – the U.S. announced higher tariffs on metals imports, though key allies were exempted, and this initially supported some safe-haven dollar demand. Mid-week, attention turned to U.S. economic indicators: the ISM surveys showed softness in business activity, but that was soon overshadowed by a stronger-than-expected May jobs report. Nonfarm payrolls growth, while a touch below the prior month’s pace, came in solid, and wages showed healthy gains. This gave a brief lift to U.S. Treasury yields and the dollar. However, the boost was short-lived as the Federal Reserve’s guidance remained prudent – the Fed is likely to maintain its current policy stance, awaiting clearer signs before any move. Additionally, with the European Central Bank easing and hinting at a pause, global risk sentiment improved, which somewhat weakened demand for the safe-haven dollar. By week’s end, the greenback eased back, aiding currencies like the pound and euro to recover from earlier lows. Overall, the DXY index ended slightly down on the week, reflecting the view that the Fed will not rush into additional tightening.
U.S. inflation data will dominate the agenda, potentially stirring volatility in the dollar. The headline CPI for May (due Wednesday) is projected to show inflation accelerating again, in part due to base effects from last year. Analysts at Lloyds forecast both headline and core CPI climbing to around 2.5% and 2.9% year-on-year, respectively– an uptick that would mark a reversal of the recent disinflation trend. Producer price inflation (Thursday) and two key surveys of consumer inflation expectations – the NY Fed’s on Monday and University of Michigan on Friday – will provide further insight into price dynamics. Notably, short-term inflation expectations have risen in response to tariff news and growing price pressures, even as longer-term expectations remain relatively anchored. If the CPI comes in hot, markets could reprice Fed expectations, questioning the current benign outlook on rates. Such a scenario might bolster the dollar initially on speculation the Fed could turn more hawkish. Conversely, any downside surprise in inflation would reinforce the Fed’s wait-and-see stance and could weigh on the dollar as investors anticipate potential rate cuts later in the year. With the Fed’s policy meeting looming the following week, dollar traders will be highly sensitive to these data points, making inflation the pivotal theme for USD in the days ahead.
The ECB cut interest rates by 0.25% at its June 5 meeting, as expected, lowering the deposit rate from 2.25% to 2.00%. This was the seventh consecutive rate cut, but the ECB surprised the market by suggesting we are near the end of this rate-cut cycle, potentially with a pause next month.
The BoC is held 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 whilst policymakers continue to evaluate the impact of prior easing.
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*Interbank rates are correct at 7am on the date of publishing.
