he most interesting moves in the FX markets was, however, found elsewhere. The Swedish Krona was the best performing G10 currency, rebounding from its recent extreme lows after inflation data finally came in largely as expected. Elsewhere, we are seeing some violent price swings in emerging market currencies, though the overall direction is not clear and the move dependent largely on local concerns. Hence, we saw the South African Rand rally by 2% against the Dollar whereas the Turkish Lira moved in the opposite direction.

The news calendar is fairly light this week. Focus will be on the UK’s labour report on Tuesday, which takes on additional importance now that the Bank of England made it clear that further hikes in interest rates will be strictly data-dependent.

Major currencies in detail

GBP

The Bank of England left rates unchanged last week, though two dissenters voted for an immediate rate hike. Growth projections for 2018 were downgraded significantly from 1.8% down to 1.4%, while inflation expectations were lowered as well. This was a fairly dovish development, and the market promptly further downgraded its expectations for hikes. A June hike is now deemed to have just a 10% likelihood.

In this context, incoming economic data becomes even more important. The key issue is to what degree the first quarter slowdown was weather related. The labour report should add some visibility here.

EUR

It was a very thin week for economic news out of the Eurozone, and this week is not much different. It will be interesting to watch the Euro reaction to the populist coalition that appears to be close to forming a government in Italy. So far, the reaction from currency markets has been extremely muted. We do not expect this to change. All the noise coming out of Italy indicates that the populist government will not present a major challenge to European institutions, and will instead try to launch reasonable programmes that will result in nothing worse than a modestly larger deficit.

USD

Headline US inflation increased to 2.5% in April, but the details of the report were soft. Core inflation, which strips out volatile food and energy components, only increased 0.1% for the month, leaving the annual increase at 2.1%.

All in all, the critical 10 year US Treasury yield remains still below the psychological threshold of 3%. While we expect the Dollar to trend modestly higher over the next few months, we think we need to see this interest rate break clearly above 3% before the Dollar rally resumes.