Last week brought a significant shift in market sentiment, particularly for the US Dollar. While much of the year has been characterised by concerns around slowing growth and expectations of future rate cuts, Friday’s Non-Farm Payrolls report reminded markets that the US economy remains remarkably resilient.
The jobs report came in significantly stronger than expected, prompting a sharp repricing across asset classes. The US Dollar strengthened meaningfully, with EUR/USD falling towards 1.15 and GBP/USD closing the week around 1.3330. Equity markets reacted negatively, with the S&P 500 falling 2.6% and the Nasdaq dropping 4.2% as investors reassessed the likelihood of future Federal Reserve easing.
Personally, I think the market reaction in equities may prove to be somewhat overdone. Strong employment data ultimately points to a healthier economy, stronger consumer spending and continued corporate earnings support. While a stronger labour market may reduce the urgency for rate cuts, and could even reopen discussions around further tightening if inflation remains elevated, I struggle to see how a resilient economy becomes a long-term negative for risk assets. There is every chance that investors look back at last week’s sell-off as a buying opportunity rather than the start of a deeper correction.
As we move into the new week, attention shifts back towards inflation, central banks and growth data, all of which could help determine whether the Dollar’s recent strength has further room to run.
Monday: Focus on Japan
The week begins with GDP data out of Japan, where growth is expected to improve to 0.3%. While not typically a major market-moving release, it comes at an interesting time for the Japanese economy.
The Bank of Japan remains one of the few major central banks still moving towards tighter monetary policy, and another positive growth reading would strengthen the case for further rate increases in the months ahead. As a result, markets will be watching closely for any signs that Japan’s recovery continues to gain momentum.
Tuesday: Trade and Employment Data
Tuesday’s focus turns to Germany and the United States.
Germany’s trade balance is expected to show a surplus of €12.2 billion, slightly lower than the previous reading but still reflective of the country’s strong export sector.
In the US, we receive ADP employment data, which will provide another snapshot of labour market conditions following Friday’s strong payroll report. While ADP figures do not always correlate perfectly with Non-Farm Payrolls, another strong reading would reinforce the narrative that the US labour market remains resilient.
We also receive US trade balance data, where economists expect the trade deficit to narrow slightly compared to April. Any improvement would be another positive signal for overall economic activity.
Wednesday: Inflation Back in the Spotlight
Wednesday’s headline release is US CPI inflation.
Core inflation is expected to rise to 2.9%, and given the market reaction to Friday’s payroll report, this data point takes on even greater significance. If inflation comes in above expectations, markets may begin to seriously question whether the Federal Reserve can realistically cut rates in the near future.
Later in the day, the Bank of Canada announces its latest interest rate decision. Markets expect rates to remain unchanged at 2.25%, with policymakers likely maintaining a cautious stance while they assess the impact of previous policy decisions and monitor inflation developments.
Thursday: ECB Takes Centre Stage
Thursday’s key event is the European Central Bank rate decision.
Markets are expecting a 25 basis point increase, taking rates to 2.4%. While the move itself is largely priced in, it represents a notable shift from where expectations stood just a few months ago. Rising energy costs and renewed inflation concerns have forced policymakers to adopt a more cautious approach.
The focus will be less on the rate increase itself and more on President Lagarde’s comments regarding future policy. If the ECB signals that further tightening remains possible, the Euro could find additional support.
Friday: A Big Day for Sterling
Friday’s attention shifts firmly to the UK.
Monthly GDP is expected to contract slightly to -0.1%, reversing some of the recent improvement seen in economic data. Alongside GDP, we also receive trade balance, industrial production and manufacturing production figures.
Taken together, these releases will provide one of the clearest snapshots yet of how the UK economy is coping with higher inflation, elevated borrowing costs and ongoing political uncertainty.
For Sterling, this could prove to be the most important day of the week. A stronger-than-expected set of figures would help support the Pound and reinforce the view that the UK economy remains relatively resilient. However, weaker numbers would likely increase pressure on Sterling, particularly given the political uncertainty that has emerged following Labour’s poor local election performance.
Outlook
The biggest shift over the past week has been the return of US Dollar strength.
Strong jobs data has reminded markets that the US economy is still performing well, and unless inflation begins to cool more rapidly, the case for aggressive Federal Reserve rate cuts looks increasingly difficult to justify.
As a result, the Dollar remains supported heading into the week ahead.
The Euro could also find support if the ECB delivers the expected rate hike and signals that inflation remains a concern. Meanwhile, Sterling faces a more challenging backdrop, with Friday’s GDP release likely to play a key role in determining short-term direction.
Overall, the outlook remains broadly constructive for the US Dollar, potentially constructive for the Euro, and highly dependent on incoming economic data for Sterling. With inflation, growth and central bank expectations all in focus, another volatile week for FX markets looks likely.
GBP/EUR 1.1559 GBP/USD 1.3317 GBP/AED 4.8933
GBP/AUD 1.8890 GBP/CHF 1.0624 GBP/CAD 1.8578
GBP/NZD 2.2952 EUR/USD 1.1504 GBP/ZAR 22.0843