GBP: The Monetary Policy Committee meeting in May essentially left open the subject of whether to make a cut in June. It will, of course, rely on the data collected over the next two months, especially on inflation, before the meeting. This week sees the release of the first such data point. It is widely anticipated that the annual statistics on the headline and core indices will decline far more than before, albeit mostly due to base effects. This would pave the way for a move in June. The advance PMI activity indexes for May will be out the day after this data. Although a large number is anticipated, the trading of sterling should not be much affected.

EUR: The ECB’s communications are becoming more and more explicit about the fact that, although a June cut has been committed to and is certain, any actions taken in the meantime remain quite unclear and dependent on data. It appears that the markets anticipate one or two more rate cuts this year, which makes sense to us given the strengthening Eurozone economy and decreasing need for monetary relief.
We believe that the undervaluation of the euro, strong domestic demand, and the Chinese rebound will continue to be positive factors for the common currency in the medium run.

USD: It is clear from the enormous relief reaction in the financial markets that followed a very slight downward surprise in the April inflation report that concerns were running very high and that traders and speculators are still heavily long the US dollar. Although the headline number was less than anticipated, services inflation is still running hot at above 5%, according to the more significant core subindex. Since there won’t be any significant market movement this week and there will be a gap in US data, we would expect the US dollar to continue its downward trend as the excess supply of long positions is cleared.

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