Most read: EUR/USD Trade Setup – Bullish Continuation Depends on Breakout of Resistance
The new week will start slowly as both the US and UK markets will be closed on Monday – the former for Memorial Day and the latter for a holiday. Holidays in these financial centers mean lower trading volume, potentially leading to sluggish price action. But there’s a catch: the low liquidity can sometimes magnify price movements when unexpected news hits the market, while fewer traders are present to take buy and sell orders. That said, caution is advised for those who still decide to trade on Monday.
As we progress through the week, we expect a relatively quiet period with few high-impact events likely to lead to significant volatility. Nevertheless, the landscape could change on Friday with the release of critical economic indicators. On one side of the Atlantic, Eurozone CPI figures for May will be released. Across the pond, we get data on core consumer spending prices, the inflation gauge the Fed watches most closely.
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Eurozone
The European Central Bank is likely to cut borrowing costs from a record high of 4% at its upcoming meeting in June. However, the extent of further interest rate cuts will depend on the inflation outlook. In this sense, the May Flash CPI report will be crucial as it will provide valuable insights into recent price trends within the regional economy, which will play a central role in guiding the monetary policy trajectory.
Analysts expect eurozone inflation to rise to 2.5% yoy this month from 2.4% in April, with the core indicator expected to remain stable at 2.7%. The slight increase in data may not stop the ECB from pulling the trigger next month, but an upside surprise could prompt the institution to take a more cautious approach to future easing. In light of these developments, Euro FX pairs may be subject to increased volatility heading into the weekend.
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US
The core data of the PCE deflator will also be released on Friday. Consensus estimates point to a 0.3% increase in April, with annual rates cooling from 2.8 to 2.7%, indicating a small but favorable direction. A downside surprise could fuel optimism that the disinflationary trend, which began in late 2023 but stalled earlier this year, is back on track, which would strengthen the case for the FOMC to move to a looser stance sometime in the fall to go. This should be bearish for the US dollar, but positive for stocks and gold.
Conversely, if inflation rates exceed forecasts, interest rate expectations could shift in an aggressive direction, delaying the Fed’s timetable for initiating rate cuts. In this scenario, November or December could become the new basis for a possible move by the US central bank. Such a development could push bond yields and the dollar higher, creating a more challenging environment for stocks and precious metals.
For an in-depth look at the variables that could impact the financial markets in the coming week, explore the DailyFX team’s extensive forecasts and analysis. Our expert analysis can enable you to navigate the dynamic market environment and make smart trading decisions.
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