• USD can continue to edge higher. May US jobs data strong, CPI the next focus.

• ECB poised to rate rates and trim its growth outlook.

• BOC, BCRP, and CBTR to keep rates on hold.

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Friday’s solid US jobs data catapulted the dollar index (DXY) to its highest level since early April. May nonfarm payrolls rose 172k, nearly double expectations, and the three-month average payroll gains increased to 188.3k per month, the strongest since March 2024. Also, the unemployment rate was steady at 4.3% for a third consecutive month and continues to track below the FOMC 2026 projection of 4.4%. Attention shifts this week to US May CPI to assess the persistence of inflation.

USD can continue to edge higher as the US macro backdrop of improving labor demand and sticky inflation back a more restrictive Fed policy stance. Fed funds futures fully price in a 25bps rate hike to a target range of 3.75-4.00% by year-end and nearly 50bps of tightening in the next twelve months.

US Inflation: Sticky Situation

May CPI takes the data spotlight on Wednesday. Headline CPI is expected to rise 0.5% m/m vs. 0.6% in April to be up 4.2% y/y (the most since April 2023) vs. 3.8% in April on higher gasoline prices. Core CPI is seen at 0.3% m/m vs. 0.4% in April or 2.9% y/y vs. 2.8% in April. Overall, the disinflation trend has clearly stalled even when looking at CPI measures which filter out extreme price swings, like trimmed mean, median, sticky, and super core.

The May PPI (Thursday) and June University of Michigan sentiment survey (Friday) will round out the inflation picture. PPI will offer insight into pipeline price pressures, while the Michigan survey will be watched for signs that long-term inflation expectations remain anchored.

BOC Holding the Line

The Bank of Canada (BOC) is widely expected to keep the policy rate on hold at 2.25% for a fifth straight meeting (Wednesday). BOC is also poised to stick to its two-way policy optionality introduced in April that new US trade restrictions on Canada would argue for cuts, but persistently high energy prices could warrant “consecutive increases in the policy rate.”

The swaps curve more than fully price-in 50bps of rate hikes over the next twelve months. In our view, Canada’s contained inflation backdrop gives the BOC scope to keep rates on hold for an extended period and assess whether the rebound in May employment and April real GDP is sustained.

Bottom line: there is room for BOC rate hikes bets to adjust lower against CAD. USD/CAD immediate resistance is offered at 1.3967 (March 31 high). If this level gives way, the next target is the November 2025 high around 1.4140.

ECB Turning the Screw

On Thursday, the ECB is set to end a seven meeting pause with a 25bps policy rate hike to 2.25% to curb rising inflation pressures. In May, Eurozone core CPI rose to a 13-month high at 2.5% y/y, tracking closer to the ECB’s Q2 severe scenario (2.4%) than to its baseline forecast (2.2%) and adverse scenario (2.3%). Moreover, services CPI surged to a seven-month high at 3.5% y/y, raising the risk of a persistent pickup in inflation.

The ECB will also publish its June macroeconomic projections which will likely show a downgrade to its growth forecast. PMI data indicate Eurozone real GDP could contract by -0.2% q/q in Q2, a pace that sits between the ECB’s adverse (-0.1%) and severe (-0.3%) scenarios and below its current baseline forecast of +0.1%.

We expect EUR/USD to fall to 1.1400, reflecting a stronger US growth outlook relative to the Eurozone. ECB rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside.

GDP Pulse in UK

UK April GDP is due Thursday. Real GDP is expected to fall -0.1% m/m vs. +0.3% in March and track below the Bank of England’s (BOE) baseline Q2 forecast of +0.1% q/q. PMI data indicate UK real GDP could contract by -0.2% q/q in Q2.

Nevertheless, the swaps curve implies 64bps of BOE rate hikes to between 4.25% and 4.50% in the next twelve months because of upside risk to second-round effects in price and wage-setting stemming from the energy shock. A first full 25bps BOE rate rise is priced-in for the September 17 meeting.

We expect GBP/USD to fall to 1.3100, reflecting a stronger US growth outlook relative to the UK. BOE rate hikes in a sluggish growth, high inflation environment, is not bullish for GBP but should help cushion the downside.

The UK political backdrop can amplify a GBP undershoot. Attention is increasingly shifting to the June 18 Makerfield by-election. Recent polls show Andy Burnham with a 10-point lead over Reform UK, potentially clearing a path for his return to parliament and a leadership challenge to Prime Minister Keir Starmer. A Burnham-led Labour government will likely lead to more spending and borrowing, worsening UK fiscal credibility.

Inflation Pulse in Norway

Norway May CPI is due Wednesday. Headline is expected at 3.1% y/y vs. 3.4% in April and underlying CPI is seen at 3.3% y/y vs. 3.2% in April. The Norges Bank projects both CPI and underlying CPI at 3.3% y/y in May. A hot inflation print can bring forward the timing of the next Norges Bank rate hike.

At its last May 6 meeting, the Norges Bank unexpectedly raised rates 25bps to 4.25% and left the door open for another hike by year-end because “inflation is too high and has run above target for several years.” The swaps curve price in a full 25bps hike to 4.50% in November.

USD/NOK is unlikely to buck the trend of broad USD strength. But NOK can keep outperforming on the crosses the longer the energy price shock persists. Norway gets the terms of trade boost and has fiscal space to absorb some of the growth drag to domestic demand.

Peru: Rates on Hold, Politics in Play

Today is Peru’s presidential election run-off between conservative Keiko Fujimori and leftist Roberto Sánchez. Polls are tight raising the stakes for Peruvian financial markets. A victory by Fujimori would likely be viewed as market-friendly and support PEN, while a win by Sánchez could weigh on sentiment and weigh on PEN.

Thursday, Peru’s central bank (BCRP) is widely expected to keep rates unchanged at 4.25% for 9th consecutive meeting. A hawkish hold is likely given inflation has been above the bank’s 1 to 3% target range since March.

Türkiye’s Balancing Act

Türkiye’s central bank (CBTR) is expected to extend the pause to its easing cycle and keep rates on hold at 37.00% for a third straight meeting (Thursday). CBTR raised its year-end CPI target to 24% (from 16%) while economic activity almost stalled in Q1 (real GDP grew 0.1% q/q vs. 0.4% in Q4). Turkey’s stagflationary backdrop remains a drag on TRY.