GBP: The Bank of England’s renewed focus on the issue and the string of inflation shocks that have driven UK rates steadily higher continue to boost the pound, which is already the best-performing G10 currency for the year. The May employment report, and in particular the pay growth figure, will be crucial for this week. It will be difficult for the MPC to downplay the true risk of second round effects as long as the latter stays above 7%. Overall, we believe that the rate environment is favourable for continued pound strength.

EUR: Retail sales for May and the revision to the June flash PMI indices both came in below expectations, which added to the doom that has begun to descend upon the Eurozone’s economy. For the time being, the Euro was able to ignore it, but we believe that the perception of China’s economic recovery is still excessively pessimistic. There won’t be much data from the Eurozone the following week. For better or worse, there won’t be much material revealed before the July ECB meeting, so statements by central bankers will be the common currency’s main focus.

USD: The headline payrolls statistic for June came out last week after a flurry of US labour market reports that were a little less than anticipated. However, FX markets interpreted it as a warning that the recent dollar gain may have been excessive and popular positions were unwound despite the fact that the data cannot be classified as bad and US rates actually continued to climb higher throughout the week. The Japanese Yen emerged as the week’s biggest winner, recovering substantially even as emerging market currencies fell, an indication that the year’s most well-liked trades are encountering difficulties and that trader positions are being closed off. This week’s attention will be on whether the current increase in FX volatility and unwinding of well-liked 2023 trades will continue. The US Inflation for June is released on Wednesday. Both the headline and core indices are predicted to continue to drop, which might be advantageous for the damaged US bond markets but detrimental to the US currency.

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