- Middle East developments keep the Dollar range bound.
- But Fed rate hike bets remain elevated ahead of key US PCE data.
- RBNZ decision and Australia CPI data to test steep implied rate paths.
- Accelerating Tokyo CPI figures could ease intervention fears.
- Flash Italian, French, German CPI numbers, and Canada GDP also on tap.
Geopolitics Continue to Dominate the Market
After recording its strongest week in two months, the US Dollar traded in a consolidative manner this week, with the Dollar index oscillating between 98.80 and 99.40. The greenback started Monday on a strong footing following fresh Middle East tensions, including hostile rhetoric between US and Iranian officials, as well as drone attacks.
That said, Iran offered the US a new peace proposal just after the frictions, while US President Trump said on Wednesday that they are in the “final stages” of peace talks with Iran. This, combined with news that some vessels successfully passed through the Strait of Hormuz, put a lid on the Dollar’s rally and allowed oil prices to pull back.
Nonetheless, although the greenback did not accelerate its advance, it did not slide either. Perhaps this was due to the Fed minutes revealing growing concern among policymakers about inflation getting out of control, with several members becoming more open to the idea of rate hikes.
US PCE Data in Focus Amid Elevated Inflation Concerns
This allowed investors to maintain bets of a 25bps rate hike in the foreseeable future. A hike is more than fully priced in by March, while there is a strong 70% chance that it may happen this year.
Even if oil prices do not rally further, inflation could stay elevated as annual rates compare prices now with prices a year ago, which were still much lower. Therefore, should incoming data continue to confirm that, investors may decide to bring even closer the timing of when they expect a rate hike.
With all that in mind, Thursday’s core PCE index for April, the Fed’s favorite inflation gauge, comes alongside personal income and spending data for the same month, as well as the second estimate of GDP for Q1. Considering the hotter-than-expected CPI and PPI prints for the month, the risks surrounding the PCE indices may be tilted to the upside.
Higher-than-expected PCE rates, combined with decent growth-related data, could strengthen the case of a rate hike later this year and may allow the US Dollar to gain some more ground, especially if the US and Iran hit another dead end in peace talks.
Will the RBNZ Reiterate Its Hawkish Message?
Flying to New Zealand, the Reserve Bank of New Zealand gathers to decide on monetary policy on Wednesday. When they last met, policymakers decided to keep the official cash rate unchanged at 2.25% but appeared concerned about the impact of the Middle East conflict on inflation and economic growth, signaling that they stand ready to act “decisively” if price pressures become more prominent.
This was interpreted as a hawkish hold, which combined with the acceleration in the 1- and 2-year inflation expectations, convinced investors that around three quarter-point rate hikes may be warranted by the end of the year. Although the probability of action at this gathering remains low at 25%, it rises to 80% for the July meeting.
Therefore, another hold accompanied by hawkish language could seal the deal for a July hike and perhaps send the Kiwi higher.
Australia’s CPI May Recharge the RBA
Only half an hour ahead of the RBNZ decision, Australia’s CPI inflation for April will be released. The RBA has already hiked three times, and although it appeared content to pause its tightening efforts for a while, there are still another 70bps worth of rate increases penciled in by the end of 2026, according to Australia’s Overnight Index Swaps.
The March CPI yearly rate jumped to 4.6% from 3.7%, and further acceleration could prompt traders to price in an even steeper implied path, which could add fuel to the Aussie’s engines. After all, the RBA has an inflation target range of 2–3%, and CPI rates are already well above the upper bound.
Yen Awaits Tokyo CPI Data for Intervention Relief
In Japan, the highlight is likely to be the Tokyo CPI report for May, accompanied by the industrial production and employment data for April. Even after Japanese authorities intervened a couple of times recently, the Yen is on the back foot against its US counterpart, with Dollar/Yen returning within the 158–160 zone, where Finance Minister Katayama tends to become more vocal about officials’ willingness to intervene.
Accelerating Tokyo CPI figures could strengthen the likelihood of a BoJ rate hike at the upcoming gathering and increase the chances of more increases in the coming months. According to Japan’s Overnight Index Swaps, there is a 75% chance of a hike on June 16, while another one is nearly fully factored in by the end of the year.
Increasing rate hike chances are likely to help the Yen strengthen and probably lessen the risk of intervention. However, the BoJ may need to satisfy market expectations if they really want to help any intervention to have the desired effect and avoid further speculative declines in the Yen.
Italy, France, Germany Release Inflation Data; Canada GDP Also on Tap
Finally, on Friday, the preliminary CPI data for May from Italy, France and Germany will provide an early gauge of where inflation in the Eurozone may be headed. The Eurozone CPI data will be released on Tuesday, June 2. The ECB is now expected to press the hike button at its upcoming meeting while another 40bps worth of hikes may be on the cards thereafter. Increasing risks that inflation may spiral out of control could result in a more hawkish rate path, but whether this will help the Euro move higher remains doubtful.
While the ECB is expected to raise interest rates more aggressively than the Fed, at the same time, the Eurozone economy seems to be affected more severely by the current energy crisis and the war in the Middle East. This is evident by the weakening PMIs, with the bloc’s flash composite PMI for May sliding further into contractionary territory, to 47.5 from 48.8.
Canada’s GDP for Q1 and March are also on Friday’s agenda. The Loonie held relatively well amid the geopolitical chaos in the Middle East, perhaps receiving support from the rising oil prices. After all, Canada is the fourth largest oil exporting country in the world. Thus, if the data suggests that the Canadian economy remained resilient amid the turmoil, the Loonie could benefit a bit more.
