The dollar struggled in lackluster trading last week, as the rebound in commodity prices and improving investor sentiment meant the main 2023 trends continue to drive markets: a soft dollar, and a particularly strong showing by commodity currencies. Latin American currencies continue to shine, and at the other end, we have the Turkish lira, spiralling down week after week as markets lose patience with Erdogan’s bizarre fiscal and monetary notions. After a news-light week, markets are bracing for the Federal Reserve and European Central Bank meetings. Markets are pricing in a one-third chance of a hike from the Fed Wednesday. However, the release of the critical inflation report for May the day before means that some FOMC members likely will not decide their vote until the day of the meeting. The ECB decision is an easier call, with markets and strategists universally expecting a 25 bp hike; the key there will be the new staff forecasts and the hawkishness of the communications. Expect plenty of volatility.


Sterling continues to drift higher against both the dollar and the euro, as markets expect the Bank of England to react to sticky inflation by hiking rates well above 5%. This week’s macroeconomic data could provide the next leg up for the pound. Another strong labor market report is expected, with wages seen growing at a near 7% rate. April monthly GDP should meanwhile mark a return to growth. For now, therefore, the path of least resistance for the pound seems to be up.


The final GDP report for the first quarter of 2023 showed that the Eurozone did enter a recession, albeit only by the most technical definition of the term: two consecutive quarters of a tiny 0.1% contraction. This data point is lagged and backward-looking, but it did add marginally to the gloom about recent European economic performance. We think, however, that the technical recession is mostly due to one-off factors and the Eurozone economy is well poised to perform in the coming quarters, as the lower energy prices and a tight labor market support household spending. If the widely expected interest rate hike by the ECB this week is accompanied by hawkish rhetoric, the euro should receive support from the meeting.


The two big events in quick succession this week may finally cause the dollar to break out of the indecisive range where it has been stuck recently. On Tuesday we get the inflation report for May. It will be closely watched as an upward surprise there could be enough to tilt the next day´s decision to a hike. We are going with the market consensus for unchanged rates in June, but possible dissents and hawkish communications could assure markets that the next move in rates is more likely to be up than down. However, we are a lot closer to the end of this hiking cycle in the US than in the Eurozone, and so we expect the dollar to underperform over the medium term.