The dollar has had a good couple of sessions. It has been buoyed by both Friday's stronger-than-expected US jobs report and by weekend results from European Parliamentary elections, which have resulted in French President Emmanuel Macron gambling with a call for early elections. Some political uncertainty in Europe, at a time when the US economy continues to perform well, weakens the case for holding anything other than the high-yielding dollar. Notably, the dollar pays the highest one-week deposit rates in the G10 space at 5.37% per annum.

In terms of the US story this week, the focus is very much going to be on Wednesday. Here, investors will receive updates on both the latest (May) US CPI figure and also hear the latest policy decision from the Federal Reserve. Wednesday's FOMC will also see the Fed present its latest quarterly projections, which include its Dot Plots. Most are expecting those median Dot Plots to show the Fed scaling back its expectations of rate cuts this year to two, or even to one from the three rate cuts expected in the last set of projections in March.

The above conditions are clearly not the right ones to encourage a dollar sell-off. And it may be that French elections now deter investors from selling dollars for the entire month of June. DXY has broken back into this year's bull channel and has gapped higher overnight. The bottom of the gap at 104.96 will now prove support and the near-term bias looks to lie towards the 105.55 and possibly the 106.00 area.

EUR/USD has sold off around 0.5% on the back of the weak results in European parliamentary elections. It has been independent weakness in the euro here, where EUR/GBP and EUR/CHF have broken down sharply. Most expected a rightward shift in these elections and the results do suggest that Ursula von der Leyen's European People's Party (EPP) will still be able to command a majority in the European Parliament. Yet it is events in France that have hit the headlines. President Macron's party has performed so poorly, gathering just 15% of the vote, that he's dissolved parliament and called elections for 30 June (second round 7 July). This move is widely seen as a gamble either to question the French electorate on whether they really want a far-right government or to give the electorate three years' experience with a far-right government ahead of the next French presidential election in 2027. While Marine Le Pen's National Rally party has shifted away from the anti-euro manifesto it ran on in 2017, fears about shifting support for Ukraine stand to unnerve markets.

Today EUR/USD may well have another leg lower to the 1.0700/0720 area once US investors fully have a chance to appreciate events in European politics. And the risks of another uncomfortable 0.3% month-on-month US core CPI print on Wednesday will probably keep the dollar in the ascendancy until we hear from the Fed Wednesday evening.

EUR/GBP has broken big support at 0.8500 and is towards the lowest levels since 2022. The gap lower in Asia now means that the top of the gap at 0.8490 marks strong short term resistance. Expect to hear much made of the diverging political scenes, where the forthcoming UK general election is expected to present the UK with a very large Labour majority, whereas the French election promises to deliver a parliament diametrically opposed to the presidency.

We probably cannot rule out EUR/GBP edging a little lower this week - perhaps to 0.8400. Tomorrow's UK April's jobs data could add to the move if wages stay sticky above 6%. But we think this sterling rally does not last and probably reverses next week when we hear from the Bank of England next Thursday - likely preparing the market for an August rate cut.

The results of the weekend European parliamentary elections could unnerve CEE currencies today. And the threat of Le Pen's party doing well at elections on 30 June - plus what that means for Europe's commitment to Ukraine - may well demand a risk premium in CEE currencies this month.

In the economic space, this week in the CEE region will be marked by inflation prints. Today we will see the May inflation number in Hungary, which will be hit by the base effect from last year. We expect a rise from 3.7% to 4.2% year-on-year, in line with expectations. On the other hand, core inflation should fall from 4.1% to 3.8% YoY. We will see another inflation print in the Czech Republic on Tuesday. Here, we expect a tick down from 2.9% to 2.8% YoY. Food prices, which were the reason for the upside surprise in April, should correct slightly.

At the same time, as in Hungary, fuel prices are pushing headline inflation down. Current account data will be released on Thursday in Poland and the Czech Republic. On Friday in Poland we will see final inflation data, which should confirm 2.5% YoY. We will also see the Fitch rating review of Hungary, where our economists see a high chance for a downgrade.

Friday's US labour market data turned the EM market into a sell-off mode again that hit CEE FX hard. Core rates jumped significantly on Friday and the following days should see CEE rate markets catch up with the move. Of course, inflation prints will also play a big role, which may result in significant FX volatility this week. However, at the start of the week we see PLN (which lost the most on Friday) as the most undervalued currency in the region due to the rate differential, which hasn't changed much. But a return to 4.280 EUR/PLN may appear to be a challenge now. EUR/HUF seems to be at fair levels at the moment, while we see EUR/CZK higher at 24.80.

Gamestop GME stole the limelight last week with it being capped off by RoaringKitty having a live stream on Friday about his Gamestop position. Last week also had some positive news releases which helped us continue the previous Friday's rally into the close this week. We finished up around 1.25% to $534.01 on the SPY.

Japan's economy contracted less than initially reported in January-March on upward revisions to capital spending and inventory data, lending modest support to the central bank's plans to raise interest rates again this year.

Analysts expect the Japanese economy to have bottomed out in the first three months of the year, although a stubbornly weak yen and disruptions at major automaker plants continue to cloud the outlook for the current quarter.

Still, "the revised GDP results made it easier for the Bank of Japan (BOJ) to feel encouraged about future rate hikes as it can assess capital investment is picking up even by a little bit," said Kohei Okazaki, senior economist at Nomura Securities.

Japan's GDP shrank a revised 1.8% annualised in the first quarter from the previous three months, Cabinet Office data showed on Monday, a smaller decline that economists' median forecast for a 1.9% contraction and a 2.0% decline in the preliminary estimate.

The revised figure translates into a quarter-on-quarter contraction of 0.5% in price-adjusted terms, unchanged from the initial reading issued last month.

People enjoy drinks and food at an izakaya pub restaurant at the Ameyoko shopping district, in Tokyo, Japan February 15, 2024. REUTERS/Issei Kato/file photo Purchase Licensing Rights, opens new tab

The revised GDP data comes on speculation the BOJ may discuss cuts in its Japanese government bond (JGB) purchases at its policy review this week as part of efforts to unwind monetary stimulus to curb yen weakening.

Investors are looking for clues on the timing of further rate hikes by the central bank, which raised rates in March for the first time since 2007 in a landmark shift away from ultra-loose monetary policy.

"We can say capital spending picked up in the latter half of the fiscal year-end in March 2024...current capex conditions are a relief but we must be cautious about the outlook," Okazaki said.

"We can also maintain the view that consumption is on track for recovery due to hefty pay raise agreed at annual labour talks and income tax cuts that kicked in from June."

Private consumption, which accounts for more than half of the Japanese economy, fell 0.7% in the first quarter, unchanged from the preliminary estimate as rising living costs squeezed household finances. It was a fourth straight quarter of decline.

External demand, or exports minus imports, shaved 0.4 of a percentage point off overall GDP, while domestic demand knocked off 0.1 point, the data showed.

With hyperinflation in the post-pandemic era easing and economic growth slowing down around the world since this year, major central banks are considering easing monetary policy. Especially, the timing of the Fed rate cuts has attracted the most attention. However, as half a year has passed, the Fed seems even further away from cutting rates, and the other major central banks have acted before the Fed.

Canada's inflation has slowed faster than expected since the beginning of the year, with its CPI slowing to 2.7% in April. The Bank of Canada (BOC) gained increasing confidence in inflation moving towards the 2% target and thus decided to cut rates on June 5, 2024, marking its first rate cut since 2020. It lowered the benchmark interest rate by 25 basis points to 4.75%, in line with market expectations. The BOC was the first among the G7 countries to cut interest rates, leading the way for global monetary policy.

The Bank of Canada's move signals that other central banks can also lower rates before the Federal Reserve and their monetary policies do not have to synchronize with that of the United States. Only a day later, the European Central Bank (ECB) cut its three main interest rates by 25 basis points given the progress made in disinflation, after keeping interest rates unchanged for nine months.

However, looking at the short-term market reaction, the rate cuts did not cause positive feedback in the foreign exchange market. The Canadian dollar and the euro rose again after dipping briefly following the announcement of the rate cuts. The rate cuts do not seem to have impacts as expected.

For weeks, the market had been expecting the European Central Bank to cut its deposit rate by 25 basis points from a record 4% to 3.75%, and most ECB officials didn't take any action to refute this speculation but continued to increase this expectation. Therefore, the first rate cut was almost a foregone conclusion as it had been priced in advance by the market. Thus what occurred in the market was "buying the rumour and selling the news".

In fact, what's more important for the financial markets, especially for the euro, is whether there are successive rate cuts following the first cut. When asked by reporters about the interest rate outlook, Lagarde reiterated the European Central Bank will "rely on data" and will take a "meeting-by-meeting" approach to make rate decisions. Another person familiar with the matter said that ECB officials almost ruled out the possibility of a second rate cut in July at the meeting. Judging from these words, we know that the European Central Bank does not want the market to bet on another rate cut soon. Similarly, the Fed rate cut expectations have been delayed several times, ultimately disappointing the market more heavily.

In addition, the market remains cautious about the policy divergence between the European Central Bank and the Federal Reserve which may not consider cutting rates for several months. A widening interest rate gap between the euro area and the United States could create depreciation pressures on the euro. While this may be beneficial to European exporters, it could also make the ECB's task more difficult by pushing up inflation through more expensive imports. The ECB also recognizes that the fight against inflation has not yet been over. As wage growth accelerates and domestic price pressures remain strong, inflation is likely to remain above target for a long time next year.

Similar to the ECB, the Bank of Canada is also aware of the risk of cutting rates too fast despite its optimistic inflation outlook. It did not give a clear signal to successive rate cuts but said it will take a "meeting by meeting" approach, which leaves room for dovish actions.

In short, as long as Lagarde and her counterpart do not explicitly note successive rate cuts, the outlooks for the euro and the Canadian dollar will not be too pessimistic. After all, the Federal Reserve is also on the way to cutting interest rates.

U.S. Federal Reserve and Bank of Japan meetings, a G7 gathering, plus key U.S. inflation and UK jobs data are all coming up in the week ahead - and that's not all.

Markets are digesting results from the June 6-9 European Parliament electionand a shock decision from France to hold a snap election, while Britain's Labour Party is expected to unveil its policy plans before a July 4 election it is tipped to win.

Here's the lowdown on the week ahead in world markets from Lewis Krauskopf and Ira Iosebashvili in New York, Kevin Buckland in Tokyo, and Karin Strohecker, Dhara Ranasinghe and David Milliken in London:

The Fed looks certain to hold rates steady when it ends a two-day meeting on June 12.

Inflation has cooled after aggressive rate hikes starting in 2022 but has not yet fallen to its 2% target.

May inflation figures are released just hours before the Fed statement. Further signs of inflation easing could cement expectations for rate cuts, especially given signs of economic weakness.

Wall Street, boosted by cooling inflation, will be watching closely. Traders continue to price in some monetary easing this year, although bets for a September move were slashed after Friday's robust jobs numbers.

A bad inflation miss could spook investors and bring back recession fears that have laid dormant for months.

No doubt, the data could fire markets up ahead of Fed Chair Jerome Powell's post-meeting press conference.

Bank of Japan Governor Kazuo Ueda has already dropped a strong hint of what to expect at June's meeting.

He said on Thursday that it would be appropriate to reduce still-massive bond purchases as the BOJ exits decades of stimulus, stressing policymakers will move "cautiously" on rate hikes after delivering its first rise since 2007 in March.

A consensus is building for some kind of taper of long-running quantitative easing when the BOJ concludes its two-day gathering on June 14.

Mizuho Securities sees a good chance of a 1 trillion yen ($6.4 billion) cut in monthly purchases to roughly 5 trillion yen per month, which could be weathered by bond markets.

Whether that supports the battered yen is a separate matter, with the BOJ and government concerned a weak currency could derail a hoped-for cycle of mild inflation and steady wage gains.

Leaders of the Group of Seven are pushing for progress on how to funnel urgently needed funds to Ukraine at a June 13-15 meeting in Bari, Italy, before they head to Switzerland for the peace summit on June 15-16. The push follows a recent EU decision to use the annual flow of windfall profits earned on immobilized Russian assets.

A loan backed by the income from frozen assets could provide Kyiv with as much as $50 billion in near-term funding and has emerged as one top option.

Concerns by G7 policymakers over China's growing export strength, dubbed "industrial overcapacity", particularly regarding new energy vehicles, is also in focus.

The G7 meets just after EU elections and key EU figures get the chance to discuss the outcome as well as the fallout from French President Emmanuel Macron's decision to call a snap election after being trounced in the EU vote by the far right.

Labour market data on Tuesday is in focus for UK investors assessing whether wage pressures are easing fast enough to make a Bank of England rate cut a near-term prospect.

Average weekly earnings, excluding bonuses, rose by an annual 6% in the three months to March, and April's 9.8% increase to Britain's minimum wage may push that growth rate higher.

Until recently, economists expected a June rate cut but persistent inflation pressures mean markets do not fully price in a move until November.

Wednesday's April GDP data is likely to show growth softened after a robust 0.6% expansion in Q1. S&P says PMI data points to 0.3% growth for Q2 overall.

And the opposition Labour Party launches its manifesto ahead of the July 4 election. While polls suggest Labour will hammer Prime Minister Rishi Sunak's Conservatives, some business leaders doubt Labour can turn around Britain's recent weak growth performance.

It's Europe's turn to benefit from music superstar Taylor Swift's Eras Tour, hitting Britain, then the Netherlands and Switzerland.

Barclays reckons the tour could provide an almost one billion pound boost to Britain's economy, with spending by ticket holders more than 12 times the average cost of a UK night out.

The Bank of America Institute says the tour's opening leg in Paris sparked a 22% year-on-year jump in international BofA card spending in the French capital May 9-13.

The spending boost, even if temporary, suggests service-sector inflation could remain sticky for longer. Some reckon the real winner is Swift: the Eras tour made her a billionaire in October, Time magazine reported. And this won't be the last time economists debate "Swiftflation" and "Swiftonomics".

The Bank of Japan meets this Thursday and Friday amid expectations it will respond to the weakness of the yen with a reduction of its bond purchases, reversing a decade-long campaign to stimulate the economy through an expansion of its balance sheet.

The central bank's next policy meeting will be a key test for Gov. Kazuo Ueda's ability to work with both the market and the government after he caused a big swing in the currency market with his remarks following the previous policy meeting on April 25 and 26.

Ueda's remarks played down the impact of a weaker yen in an effort to lower market expectations for rapid policy normalization. His words triggered a sharp sell-off of the yen and sent the currency to a 34-year low of 160 against the dollar, forcing the government to spend an estimated $62 billion to prop up the yen against the dollar.

As of Friday, the dollar was trading at 156.70 yen.

The BOJ is broadly expected to reduce the amount of monthly purchases of Japanese government bonds (JGBs) from the current level of 6 trillion yen ($39 billion), which the central bank has said is necessary to keep the size of its 761 trillion yen balance sheet constant.

Bonds have a maturity and are redeemed after a certain period, meaning that a given amount of bond holdings cannot be maintained without new purchases.

A Nikkei report on Saturday said the central bank is indeed considering to scale back the purchases. Even if the central bank decides to cut its purchasing next week, the program "should be kept as a tool for responding to sharp gains in interest rates," said a BOJ insider.

"It's important that the market remains stable," said another BOJ source.

Brokers including Nomura, Mizuho, JPMorgan, UBS, Deutsche and BNP expect the BOJ's policy board will decide to reduce JGB purchases in the June meeting, which is considered an appropriate occasion for making such an announcement, falling just ahead of the July-September quarter.

The BOJ updates its bond purchase schedule every three months before the start of the next quarter. Morgan Stanley doesn't expect any purchase reduction.

The market expects no rate hike. The predominant view is that the central bank will raise its target rate -- unsecured overnight call rates -- to 0.25% from 0%-0.1% in its following meeting on July 30 and 31. The BOJ raised interest rates for the first time in 17 years in March, from minus 0.1% to 0%-0.1%, but Ueda has emphasized his go-slow approach to avoid a shock to the economy, which has become used to monetary stimulus.

The market environment has recently turned more favorable for a reduction in bond purchases, a move that could potentially add upward pressure on bond yields. U.S. 10-year Treasury yields have dropped to a two-month low below 4.3%, with 10-year Japanese government bond yields also falling below 1% from a 13-year high of 1.1% last month. "It has made it easier for the BOJ to decide to reduce its bond purchases," said Tomoaki Shishido, a rates strategist at Nomura.

"If there is no reduction in the amount of government bond purchases, it would be quite a surprise," said Kentaro Koyama, the chief Japan economist at Deutsche Securities. "The market has already factored in a reduction and is more interested in the details of the reduction, such as how much the bond purchases will be reduced." He says there will be yen selling if there is no announcement.

Most economists believe that any reduction would be small in scale. Mizuho Securities strategists expect that monthly bond purchases will be reduced to 5 trillion yen from 6 trillion, noting that the purpose of any reduction would be to show that the central bank is doing something about the yen's weakness, which has taken a breather this week following a drop in U.S. interest rates but remains at a historic low against the dollar and other currencies. Mizuho expects the BOJ will maintain the pace of bond purchases after the anticipated June reduction.

Economists are divided over the course of the BOJ's balance sheet policy in the coming months and whether a reduction would constitute the start of quantitative tightening.

Ayako Fujita, the chief economist at JPMorgan Securities Japan, says that reductions, if decided on, would mark the start of quantitative tightening -- balance sheet reduction -- with the direction clearly toward a smaller balance sheet.

Deutsche's Koyama also says a drop in monthly JGB purchases to 5 trillion yen would "effectively mean quantitative tightening," pointing out that the amount of new purchases would be smaller than that of redemptions, leading to a reduction in the BOJ's balance sheet. Koyama expects the BOJ will decide to reduce the pace of purchases to 3 trillion yen in the Dec. 18-19 meeting ahead of the January-March quarter.

The BOJ currently owns about 54% of JGBs. Its aggressive quantitative easing program and yield-curve control policy have not only lowered interest rates but also reduced liquidity in the bond market, causing dysfunction in the market. Ueda, who became BOJ chief in April 2023, has vowed to restore the market's pricing mechanism.

As recently as Wednesday, Ueda reiterated in a parliamentary hearing that it is "appropriate" to reduce bond purchases now that monetary policy has shifted from the large-scale stimulus phase.

Some economists predict that the BOJ will stop short of declaring a full-fledged quantitative tightening. For instance, Takahide Kiuchi, an executive economist at Nomura Research Institute and a former BOJ board member, expects that the BOJ will indicate a more flexible stance on bond purchases and retain the option of either raising or lowering the purchase amount depending on market conditions, and refrain from committing to explicit quantitative tightening until late 2025.

According to a survey of 122 bond market players by the Nikkei affiliate QUICK between May 28 and 30, 38% expect a second rate hike in the July 30-31 meeting, and 32% in October.

Deutsche's Koyama is one of the economists expecting a rate hike in July, not this month. Unlike the March meeting, which was preceded by an agreement on big wage hikes at large Japanese corporations, the June meeting will take place amid generally sluggish economic data, including negative first-quarter growth and wage growth staying behind inflation, he pointed out.

By July, the full picture of spring wage hikes will become available, and the BOJ will be able to use its quarterly outlook report, to be released after the July meeting, to expound on its policy initiatives, Koyama said.

The BOJ may have less wiggle room in autumn. In September, Japan's ruling Liberal Democratic Party will hold a triennial leadership contest, in which Prime Minister Fumio Kishida could face a challenger due to his low public support rating. That could result in a change of leadership and a snap general election, like what happened three years ago when Kishida was elected as the party's new leader.

Nomura's Shishido says the BOJ would prefer to avoid a policy shift during general elections. If there is a tightening of policy around the time of an election, that could work against the party in power due to its chilling effect on the economy, putting the BOJ in an awkward position.