Last week saw a rebound in the GBP, buoyed by improved risk sentiment, stronger-than-anticipated UK economic data, and relatively hawkish remarks from certain Bank of England (BoE) policymakers.  These factors offset some dovish comments from the preceding week, bolstering the UK currency.  Consequently, money markets scaled back expectations of BoE rate cuts, leading to a shift away from fully pricing in a starting point in August. The UK 10-year government bond yield surged to its highest level in five months.

Looking ahead, we anticipate the GBP/EUR recovery to stabilise above 1.1650 at interbank, potentially testing levels above 1.17, particularly if Eurozone inflation figures come in weaker than expected.  However, both the Eurozone and UK economies face similar prospects, suggesting that central banks are likely to adjust rates more or less in sync, limiting significant trend shifts in the near term.

Any shortfall in Eurozone inflation could prompt the European Central Bank (ECB) to cut interest rates again in July, following its move in June.  The timing of this potential second cut is crucial for markets, considering the well-anticipated June action. Conversely, if inflation figures surpass expectations, the EUR could rally against GBP and USD, as markets would perceive a reduced likelihood of a July rate cut.  A strong inflation print might even cast doubt on the appropriateness of a June cut, further supporting the EUR.

In the US, a slew of market-moving releases, including the Employment Cost Index, ISM manufacturing and services PMI, job openings, factory orders, and the nonfarm payrolls report, will shape market sentiment throughout the week, culminating with the Friday report.  

These incoming data points are pivotal in assessing the trajectory of the US economy, especially as the Atlanta Fed's Nowcast for Q2 US GDP sits at an elevated 3.9%.  Investors anticipate Federal Reserve Chair Jerome Powell to reiterate the central bank's neutral stance in response to higher-than-expected inflation in Q1 during Wednesday's meeting.  However, given the widespread expectation of unchanged policy, attention will likely focus on the Treasuries Quarterly Refunding Announcement (QRA) preceding the FOMC meeting.