- US jobs data holds key to dollar upside breakout.
- Canada and Sweden face a reality check on rate hike bets.
- Poland and India poised to keep rates on hold.
USD struggled to gain much traction last week buffeted by improving sentiment tied to the Iran war and mixed US data. This week’s US jobs print will help determine whether the dollar index (DXY) remains anchored within its year-long 96.00-100.00 range or raise the likelihood of an upside break.
Additional evidence that US labor demand is stabilizing would reinforce the US growth outperformance story and underpin a firmer USD. In contrast, soft labor market data can trigger a sharper dovish repricing of Fed funds futures against USD.
US Jobs in the Spotlight
May nonfarm payrolls (NFP) is the main event (Friday). The April JOLTS data (Tuesday), May ADP employment (Wednesday), and May Revelio Labs employment (Thursday) are the warmup acts.
Consensus is looking for NFP gains of +89k vs. +115k in April and the unemployment rate is seen unchanged at 4.3% for a third consecutive month, a tick below the FOMC 2026 projection (4.4%).
Interestingly, NFP gains in the three months to April averaged 48k per month, well within the breakeven range that is necessary to keep the unemployment rate steady given the slowdown in overall labor force growth. A recent Fed research note estimates the breakeven pace of employment growth to average 18k in 2026.
In March, the JOLTS report showed the hiring rate rose to a two-year high while layoffs continued to be low and stable. If sustained, this trend would significantly ease downside risks to the labor market.
Consensus expects ADP private payrolls at +118k vs. +109k in April. For reference, the ADP weekly employment preliminary estimate showed private employers added an average of +35.75k jobs a week for the four weeks ending May 9.
There is no consensus estimate for Revelio Labs employment, but in April it showed the economy added 66.4k jobs. According to Revelio Labs, its employment data has a 0.74 correlation coefficient with the NFP survey.
May Manufacturing ISM (Monday) and the Services ISM (Wednesday) surveys will also be closely watched. The ISM indexes currently suggest labor demand is finding a floor while inflation risks are skewed to the upside, a backdrop that justifies a restrictive Fed policy setting. Meanwhile, the Fed Beige Book (Wednesday) will offer fresh anecdotal insights on US economic activity.
Canada Job Check
CAD underperformed most major currencies last week undermined by a decline in crude oil prices and Canada’s economy unexpected entry into technical recession.
Canada real GDP fell at an annualized pace of -0.1% in Q1 (consensus and Bank of Canada projection: 1.5%) and the contraction in Q4 was revised 0.4ppt higher to -1.0%. The decline in Q1 GDP may be exaggerated by a surge in gold imports. But the outsized positive contribution from inventories (+1.1ppt) suggests underlying growth is weak.
Canada’s May labor force is due on Friday. The economy is expected to add +10.0k jobs in May vs. -17.5k in April and the unemployment rate is forecast to remain at 6.9% for a second straight month. Overall, Canada’s labor market is showing increasing signs of slack with employment contracting by an average of -29k in the three months to April. In parallel, measures of core inflation are either at or below the BOC’s 2% target.
Bottom line: there is plenty of room for BOC rate hikes bets (50bps in the next 12 months) to adjust lower against CAD. USD/CAD risks a modest overshoot towards technical resistance at 1.3930, the January high.
CPI Checkpoints
Eurozone May CPI is due Tuesday. Headline and core CPI are expected to rise to 3.2% y/y (vs. 3.0% in April) and 2.4% y/y (vs. 2.2% in April), respectively. Risks are skewed to the downside given the unexpected slowdown in German inflation. More importantly, both Eurozone headline and core CPI inflation are currently tracking closer to the ECB’s March baseline forecast than to its adverse and severe scenarios:
Baseline scenario: headline and core CPI to average 3.1% and 2.2% in Q2, respectively.
Adverse scenario: headline and core CPI to average 3.6% and 2.3% in Q2, respectively.
Severe scenario: headline and core CPI to average 4.1% and 2.4% in Q2, respectively.
The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.25% at the next June 11 meeting. Rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside. We expect EUR/USD to carve out a bottom around 1.1400, reflecting a stronger US growth outlook relative to the Eurozone.
Switzerland May CPI is due Thursday. Headline CPI is expected at 0.7% y/y vs. 0.6% in April while core CPI is expected at 0.3% y/y for a second straight month. The Swiss National Bank (SNB) forecasts headline CPI to average 0.5% y/y in Q2.
Overall, inflation remains well within the range of price stability of less than 2% per annum. As such, the SNB can afford to keep rates at 0.00% for some time. The swaps curve price-in 76% odds of a 25bps rate hike to 0.25% in the next twelve months. USD/CHF will likely remain trapped within a tight 0.7760-.7910 range in the near-term.
Sweden May CPI is due Thursday. CPIF is expected at 1.3% y/y (Riksbank forecast: 1.6%) vs. 0.8% in April while CPIF ex-energy is projected at 0.3% y/y (Riksbank forecast: 0.9%) vs. 0.0% in April. Sweden’s benign inflation backdrop alongside ample spare capacity in the economy argue for an extended Riksbank hold.
In March, the Riksbank penciled in the policy rate to remain at 1.75% until Q4 2026, followed by a first full 25bps hike to 2.00% by Q1 2028. The swaps curve is more aggressive and price in 43bps of hikes in the next twelve months. In our view, the swaps curve has room to adjust lower towards the Riksbank’s more subdued tightening path which remains a headwind for SEK.
Pay Day in Japan
Japan’s April labor cash earning data (Thursday) is unlikely to shift the dial on Bank of Japan (BOJ) rate hike expectations. The less volatile scheduled pay growth for full-time workers is expected to rise back to 3.0% y/y vs. 2.7% in March. Japan wage growth is not a major source of inflation pressure given annual total factor productivity growth of about 1%. Indeed, almost all underlying CPI indicators dropped further below 2% in April.
Bottom line: there is no immediate catalyst for a more hawkish BOJ stance, meaning USD/JPY is unlikely to sustain a break below 155.00 in the near term. Meanwhile, USD/JPY should hold under 160.00 due to threat of currency intervention. Japan's Ministry of Finance purchased a record ¥11.735 trillion in the period from April 28 through May 27 to stem the surge in USD/JPY. That underscores authorities’ determination to keep a lid on USD/JPY around 160.00.
Central Bank Watch
National Bank of Poland (NBP) is widely expected to keep the policy rate at 3.75% for a third straight meeting (Wednesday). NBP signaled that its easing cycle, which saw it deliver 200bps of cuts in the past year, is over. However, it’s too soon to bet on rate hikes even though headline and core inflation in Poland are tracking above the NBP’s Q2 projection of 2.4% and 2.6%, respectively.
First, headline CPI unexpectedly dropped -0.1ppt to 3.1% y/y in May (consensus: 3.6%) suggesting limited passthrough from the energy shock. Second, real GDP grew less than expected in Q1 (0.5% q/q, consensus: 0.7%) and slowed at an annual pace of 3.4% (NBP forecast: 4.0%) vs. 4.1% in Q4. Bottom line: we expect USD/PLN to continue trading within a narrow 3.6000-3.7000 range.
The Reserve Bank of India (RBI) is expected to keep the policy rate at 5.25% for a third consecutive meeting (Friday). The risk is a hawkish surprise to further curtail INR weakness. USD/INR has already dipped from a record high of around 97.0000 on May 20 to 95.0000 on Friday driven by aggressive RBI intervention, RBI Governor Sanjay Malhotra jawboning, and a slide in crude oil prices.
