May has seen a strong rebound in the greenback. Indeed, with three solid weeks of gains, the DXY is closing in on levels last seen before the US banking blow-up. All that stress has seemingly been put aside as USD bulls aim for the March year-to-date highs. Bets on Fed rate cuts have been reined in sharply with a year-end rate now near to 5% and nowhere near the 4.25% level that had been discounted in early May. Markets also see that there is now more of a chance of 25bp rate hike at the June FOMC meeting, than the Fed pausing.

This huge shift in rate expectations, brought on by elevated inflation, a pending debt ceiling deal and a still-solid economy will be tested by the marquee US employment report released on Friday. The greenback’s stellar month is becoming slightly overbought, and attention will be focused on the wage growth numbers after their sharp jump last time. Is this the start of a sticky trend or will this widely watched data pull back? Revisions to the headline figure will also be checked as the original number consistently exceeds the estimate due to economists underestimating the strength of the labour market.

Meanwhile, stock markets, and especially the Nasdaq, are being driven higher by big cap tech names and any companies associated with the generative AI theme. The tech-laden US index hit levels last seen in April last year on Friday and has risen over 30% from its January lows. Expectations of higher interest rates typically hurt stocks, with tech names often regarded as more sensitive. But the AI bullish mood and progress in the debt ceiling talks could keep the rally well supported.

The euro has taken a fair brunt of the dollar upside pressure and is hoping the psychological 1.07 level in EUR/USD will help support it. Economic weakness appears to be slowly seeping into the German economy. But price pressures remain hot which could leave ECB policymakers in a bind. Markets are back to pricing more than two further rate hikes with the peak just below 3.75%. Focus this week will be on the inflation data for Germany and the region.

Major risk events of the week

31 May 2023, Wednesday:

–Australia CPI: Analysts forecast that the monthly indicator will gain 0.5%, one-tenth below the March print. The increase is expected to come from another 0.4% jump in food prices. This should offset any drop in housing inflation. Analysts estimate the annual reading at 6.4%, one-tenth above the prior 6.3%.

01 June 2023, Thursday

–Eurozone CPI: May headline inflation is expected to ease to 6.4% from the prior 7% due to lower energy prices and base effects. The core reading is forecast to tick one-tenth lower to 5.5%. This is all way too high for the ECB who are seen hiking rates at least two more times. The euro hopes to find a base around 1.07.

-US ISM: Consensus forecasts the headline to come in at 47.1 from 47.0 in April. Analysts say that regional surveys suggest moderate production growth. But tighter financial conditions into the third quarter may impact on goods demand keeping manufacturing growth below trend.

02 June 2023, Friday

–US Non-Farm Payrolls: Expectations are for a 180k headline print. This is set against the 253k above consensus prior number in April but a downward revision in March. The jobless rate is forecast to tick up one-tenth to 3.5% while earnings growth is likely to drop to 0.4% from 0.5% in April. This is the key figure for the Fed who it seems are keen to pause rate hikes very soon if the data allows.