US dollar on course to fall for a third week

OVERNIGHT

Asian equity markets firmed overnight and headed for a third weekly rise, aided by further Chinese stimulus hopes. The Bank of Japan kept its policy settings unchanged, as expected, including short-term interest rates at -0.1% and its yield curve control policy. That contrasted with the European Central Bank’s decision yesterday to increase interest rates by 25bps with at least another rise signalled for next month.

THE DAY AHEAD

The final reading of Eurozone CPI inflation and the University of Michigan’s US consumer sentiment survey are the main releases today. The final Eurozone CPI data are expected to confirm the preliminary ‘flash’ estimates showing a fall in the headline measure to 6.1% from 7.0% in April, the lowest for fifteen months, reflecting lower energy price inflation. Core inflation, however, remains ‘sticky’ despite falling to 5.3% from 5.6% in April. New ECB forecasts yesterday upgraded the core CPI profile over the forecast horizon mainly reflecting the strong labour market and higher wage pressures. 

The University of Michigan’s US consumer sentiment survey is expected to show a slight rebound in June from last month’s unexpectedly sharp fall to 59.2 which reflected concerns about the economic outlook. The subsequent resolution of the US debt ceiling issue should support sentiment, although confidence levels will remain relatively weak. We look for the headline sentiment index to rise to 61.0. The survey’s measures of inflation expectations will also be closely watched, including expectations for 5-10 years ahead, which have edged higher recently (see chart).

There will be attention on several central bank speakers today. The Fed’s Bullard and Waller are among participants in a Norges Bank conference on the future of macroeconomic policy. Separately, the Fed’s Barkin will speak on inflation. In the Eurozone, there are a number of ECB speakers in the calendar. There are no Bank of England speakers ahead of its policy announcement next week.

MARKETS

The euro maintained its increase after the ECB yesterday signalled further policy tightening ahead, with EUR/USD increasing to around 1.0950. Expectations for a BoE hike next week with more to follow in H2 have continued to support the pound, as GBP/USD passes through the 1.28 level. The Japanese yen, on the other hand, weakened after the BoJ decision.