Another volatile week is expected with whippy price action across asset classes. Last week’s midweek selloff in equities saw the benchmark S&P500 index clock its worst daily decline since June 2020. Corporate earnings from two of the biggest US retailers fanned the flames. The impact of inflationary pressures and ongoing supply chain disruptions on profit margins brought the outperformance of this sector to an abrupt halt.

One of the key questions for markets is whether the consumer can hold up while broad-based price rises take effect. This is also the conundrum for policymakers and especially the Fed. Recession fears have hit the dollar recently, as the FOMC strive to achieve a “soft landing” by reining in inflation pressures without choking off economic growth.

A relatively hawkish US central bank should be seen in the FOMC minutes published on Wednesday. This will give us more clues on the Fed’s thinking on how to navigate future policy tightening in such an environment.

But global yields are rising and narrowing the gap with those in the US. This key cornerstone of support for the dollar is looking a touch tired and signs of more softness in US data could see some repricing of the USD, even if other currencies have their own challenges.

The euro and pound have eased from their oversold conditions, which is not surprising when you consider the latter had fallen over 10% from January’s high. The PMI surveys in both the eurozone and UK are expected to show warning signs of the high inflation environment. The long-term downtrend in both these major currencies still remains. However, especially in the euro’s case, monetary policy expectations and rate hikes have stabilized the currency and could help extend gains in the near term.

The swiss franc was the best performing major currency last week on the back of hawkish chatter from the SNB, as well as some safe haven buying. The central bank appears to be targeting a stable real exchange rate to fight inflation. This means the exchange rate, all things equal, needs to be stronger so the CHF strength may continue.

Major risk events of the week

23 May 2022, Monday:

–IFO German Business Survey: Economists expect a print of 91.0 in May from the prior 91.8. The Ukraine conflict and a possible embargo on energy imports from Russia are likely to remain big concerns for companies. High energy costs and ongoing supply chains issues may also dampen the demand outlook.

24 May, Tuesday:

–Eurozone PMIs: The manufacturing sector is expected to fall to 55.0 from 55.5 in April. The services PMI is forecast to rise to 58.1 from 57.7. Analysts estimate the latter will stay robust as the economy continues to reopen. Going forward, rising prices and softening demand may weigh on both sectors.

25 May 2022, Wednesday:

–RBNZ Meeting: Consensus expects another 50bp rate hike to 2%. Clear signals from the bank that there is more tightening to come, with further large increases after April’s 50bp move are likely. The peak OCR estimate is close to 3.4%. The kiwi has been hit by risk-off sentiment over the past month or so. NZD/USD made a tentative bottom on 12 May low a 0.6217 and buyers will need to target 0.6529 to stem the downtrend.

–US Durable Goods: Analysts project a fall to 0.6% in April from 1.1%. Orders should remain firm with manufacturing surveys pointing to a positive outlook for business capex. That said, supply issues are set to be a headwind.

–FOMC Minutes: The May meeting minutes are expected to show a hawkish Fed who likely favour two more 50bps rate hikes at its June and July rendez-vous. How high rates might need to go will be in focus. Quantitative tightening and details on shrinking the balance sheet will also draw attention.

27 May 2022, Friday:

–US Core PCE: The PCE deflator is forecast to fall to 0.2% in April from 0.9%. The core, the Fed’s favoured inflation measure, is set to remain unchanged at 0.3%. The recent CPI report showed a minor moderation in the annual growth rate. Analysts say that real spending growth is likely to benefit from a lift in services activity.