The ECB takes centre stage and US employment in focus

 This week is likely to see a well-signaled 0.25% rate cut from the ECB, but the market will be looking for signals regarding the pace & extent of future cuts.

USD: Friday’s monthly jobs data will steal the headlines this week, after last month’s data indicating a weakening jobs market, the Fed is watching every piece of data now.

 The probability of a rate cut by the Fed in the September meeting has increased to 52% from 49% - this follows data last week showing that Personal Spending slowed more than expected - thus the Fed may not to ease conditions to prevent further weakening. Data from fast food chains in the USA gives anecdotal evidence of the squeeze being experienced by US consumers.

EURO: The ECB has a tricky task ahead, with the Eurozone economy broadly stagnant and inflation appears to be falling, but unconvincingly.  This morning saw strong data - Eurozone Manufacturing PMI increased to 47.3 in May, the highest reading since March 2023.

 The ECB has sent strong signals of a 0.25% rate cut this Thursday, but with inflation remaining sticky, the market expects just one cut more in 2024 and around 2 cuts in 2025. The market will be hanging on every word in the press conference following the announcement.

 With the June cut fully priced in, the market is looking for guidance regarding the timing of the 2 later cuts. All of this is keeping EURO/USD lower (near 1.0750), and helping GBP/EUR maintain high levels around 1.1700

GBP: GBP has stayed strong - climbing above 1.1750 vs EUR and 1.2800 vs USD, after pulling back slightly this morning. UK public expectations for inflation for the next 12 months have declined to the lowest since July 2021. 

The BoE kept rates at 5.25% (for the 6th time) last month, and the UK market expects 2 rate cuts this year (previously 6 cuts were priced in!). We can expect the bank to maintain a cautious approach to cutting rates, which keeps GBP high vs its peers.

The week ahead:

·         Monday: US Manufacturing data

·         Tuesday: German unemployment

·         Wednesday: AUD GDP / German manufacturing / EU services data / US Services data

·         Thursday: ECC interest rate decision 

·         Friday: European parliamentary elections / China trade data / EU GDP / US employment data