The dollar has started the month by regaining some of its losses from May. We get the latest US inflation data on Friday in what could be another volatile week. A peak is likely seen in this key data point, but elevated and broad-based price pressures are still expected to set the scene for the Fed’s tightening path. This should bolster support for the greenback, with US 10-year Treasury yields nearing 3% again.

The ECB is expected to keep its policy rates unchanged at its meeting in Amsterdam. But it will in some senses be a historic rendez-vous as the Governing Council is set to announce the end of QE and its large-scale asset purchase program. This will open the door to a deposit rate rise in July with money markets recently increasing their bets on a potentially bigger 50bp move.

Following the recent hawkish rhetoric and consensus-beating inflation data, are markets getting carried away with the end of negative rates now in sight? Certainly, a larger rate hike would go against the dovish side of the Governing Council who wish to see a more gradual tightening path, and that includes the “base case” set out by Chief Economist Lane and President Lagarde. That said, another blockbuster CPI print as oil goes north again, could sway the doubters to act faster and sooner. The euro has been in consolidation mode since breaking above 1.0636, the pandemic March 2020 low. That level looks like decent support while the 1.08 barrier above represents a cluster of resistance, including this year’s March low.

The RBA meeting will see another rate hike, though the size of that increase is up for debate. Having raised rates for the first time since 2010 by 25bps to 0.35% at its last meeting, the bank could raise by another quarter point, 40bps or 50bps. The latter two moves would fully unwind the emergency rate cuts from the Covid crisis in 2020. Multi-decade low unemployment and high inflation well above the target rate back up a prolonged tightening cycle, with some economists wanting policymakers to signal their intentions early on by front-loading rate hikes.

The aussie has been helped recently by the better risk mood and the news that China has been lifting some of their lockdown restrictions. Commodity prices are also back on the march which helps the iron-ore-rich nation. AUD/USD is currently trading around the 200-day simple moving average at 0.7256 with momentum still bullish. Support sits below at 0.7155, the 38.2% Fib level of this year’s high/low move.

Major risk events of the week

07 June 2022, Tuesday:

–RBA Meeting: Markets are expecting a 25bp rate hike after the first move higher since 2010 at its May meeting. This took the cash rate to 0.35%. Ongoing supply headwinds, unemployment at levels last seen in 1974 and inflation above target are some of the reasons for a bigger rate increase.

08 June 2022, Wednesday:

–German Industrial Production: Manufacturing activity is forecast to remain relatively subdued as the Ukraine conflict continues to disrupt supply chains making it hard to fill orders. Downbeat business sentiment is also likely to weigh. Output fell 3.9% in March, a drop last seen during the pandemic crisis in April 2020.

09 June 2022, Thursday:

-ECB Meeting: Analysts expect the bank to announce the end of large-scale asset purchases and signal clearly that rates will rise in July for the first time in a decade. Money markets now price in over 125bps of rate hikes by December. Focus will also be on fresh staff projections as the bank lower growth forecasts while raising inflation estimates.

10 June 2022, Friday:

–US CPI: Consensus predicts May inflation to edge to 8.2%, down one-tenth from the prior print. The core is seen falling to 5.9% from 6.2%. But inflation remains sticky and broad-based. Analysts say rents, new vehicle and food prices likely continued to climb. The primary driver of the headline figure is likely to be energy prices.

–Canada Jobs: The market median forecast is for employment to rise in May and the jobless rate to remain unchanged at the record low of  5.2%. The labour force is expected to increase by 25,000, which would be more in line with the six-month moving average change.