The familiar themes of rising price pressures, monetary policy and growth concerns continue to weigh on the market. Currently, it is the latter which is grabbing the headlines, and this means bond yields and interest rates in the US have fallen from their recent highs. In turn, the dollar has lost its medium-term support from previous-wide rate differentials.

Last week saw the overbought greenback fall for a second consecutive week, the first time this has happened this year. Markets are still set on two 50bp interest rate hikes at the next couple of FOMC meetings. However, it is what happens beyond this and the summer which should determine dollar direction. Policymakers will have a raft of the latest data to assess and decide if additional big rate moves are required. Traders are looking to see if the economy is rolling over, with softer data now printing more frequently.

This week’s highlight is the monthly US jobs report which is expected to remain resilient. Once again, it is the lack of worker supply that is the crucial problem with nearly two vacancies for every unemployed American. In turn, this tightness is likely to bid wages higher. Going forward, the pace of the increase in hourly earnings may slow which means real incomes will fall through 2022.

Ultimately, the firm jobs market should offer some support to hawkish expectations, the consumer and the dollar. A weaker than expected report would see the greenback sell off and risk markets go higher as it is more likely there will be less need for aggressive action by the Fed. As policy tightening takes effect, jobs growth should slow, and together with strengthening participation, that may signal a likely low in the unemployment rate at 3.5%.

Another half point interest rate hike by the Bank of Canada is forecast on Wednesday at its policy meeting. The CAD has been the second best performing major currency this year, after the greenback. A hawkish central bank suggesting more 50bp rate moves in the upcoming months is expected to underpin the loonie, especially against those lower-yielding currencies which are shifting monetary policy at a slower rate.

Major risk events of the week

31 May 2022, Tuesday:

-Eurozone Flash CPI: Analysts see the flash CPI estimate rising above the historic May print of 7.4%. This was a record high for the sixth consecutive month. Price pressures have continued in services and non-energy goods according to the PMI data. In addition, oil prices have started rising again, along with food indices.

01 June, Wednesday:

–US ISM: The market median is for a small drop to 55.0 from 55.4 seen in April. Regional surveys point to downside risks as supply chain issues and higher input prices make businesses more cautious about the outlook. This could negatively impact the new orders series and signal weaker growth in the second half of the year.

–Bank of Canada Meeting: Markets have virtually priced in another 50bp rate hike. Inflation is at multi-decade highs, employment is at record levels and commodity prices are elevated. The hot housing market is also an issue for the BoC to deal with. Rates are expected to rise close to 2.25% by the end of this year.

03 June 2022, Friday:

–US Non-Farm Payrolls: Consensus expect more healthy job gains with a median forecast of 350k for the headline print. This comes after a beat in April but revisions to past data. The unemployment rate is estimated to fall to 3.5% and support robust wage growth which is forecast at 0.4%.