Flash PMIs

The GBP experienced a slight dip in early trading as the UK’s public sector net borrowing figures for April came in higher than expected. The government borrowed £25.6 billion, reflecting increased energy costs, benefit payments, and interest payable on gilts. However, there is room for optimism as the energy price guarantee is likely to expire soon, and inflation is ticking down. Flash PMIs for May, which will provide insights into UK growth conditions and inflation, are expected to show robust overall growth. Attention will be focused on labor market indicators, as the Bank of England considers them central to future rate hikes. Any indication that pricing pressures are not affecting consumers would be welcomed by the central bank.

Euro Outperforms Other G10 Currencies

In the eurozone, the euro outperformed other G10 currencies except for the Swiss franc, following hawkish comments from Bank of France Governor Francois Villeroy. Villeroy stated that he expects the European Central Bank (ECB) to reach its terminal rate no later than September, implying the possibility of three additional rate hikes. The strength of the underlying economy will determine whether the ECB can and needs to raise rates to that level. May’s flash PMIs and the prices paid index for the service sector will be closely watched. ECB Chief Economist Philip Lane emphasized the need to consider core services and core goods inflation separately, highlighting the strength in services and prices paid. Positive data in these areas will support hawkish bets on the ECB and challenge the narrative of a cooling eurozone economy.

US Dollar Closes Relatively Unchanged

The US dollar closed the previous session relatively unchanged, gaining against the Japanese yen and higher beta currencies but depreciating against the euro and the Swiss franc. The bond market saw more activity, with the US 2-year yield climbing to its peak of 4.35%. Hawkish comments from St. Louis Fed President James Bullard, who advocated for two additional rate hikes this year, contributed to the flattening of the yield curve. Meanwhile, debt ceiling dynamics continue to be a concern, with ongoing bipartisan meetings aimed at reaching a deal. The market is still awaiting a concrete resolution as Treasury Secretary Janet Yellen has advanced the X-date to as soon as June 1st. Fed Chair Powell’s upcoming address and continued bipartisan talks will impact market sentiment.

May’s Flash Eurozone PMIs Will Be Significant

Growth conditions in the eurozone and how Chinese growth conditions are priced will also influence the dollar. With weakness in the Chinese yuan overnight, the dollar started the European session with strength. May’s flash eurozone PMIs will be significant, potentially challenging the narrative of European exceptionalism that has supported the euro. Additionally, the US data calendar includes preliminary PMIs for May, new home sales data for April, and the Richmond Fed manufacturing index for May.