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FXStreet: GBP/USD edges higher to near 1.2520 during the Asian session on Monday, possibly due to improved risk appetite. The Pound Sterling was bolstered by releasing higher-than-expected UK Gross Domestic Product figures on Friday. The UK economy expanded by 0.6% in Q1, surpassing forecasts and signalling the end of the nation's brief recession. This economic rebound represented the most robust growth seen in over two years. However, the British Pound faced a challenge following dovish remarks from Huw Pill, Chief Economist at the Bank of England. 

Pill echoed the sentiment of the majority of the BoE's Monetary Policy Committee, who opted to maintain interest rates at 5.25% on Thursday. Yet, he subsequently expressed a growing belief that rate cuts could be imminent. The market participants are likely to await the employment data from the United Kingdom on Tuesday with expectations of Claimant Count Change showing an increase in the number of those claiming jobless benefits in April. Additionally, the ILO Unemployment Rate is expected to show an increase in number of unemployed workers in the UK.

This week, investors in the United States are poised to focus on key economic indicators for potential market drivers, including the Consumer Price Index, Producer Price Index, and Retail Sales. On Friday, the US Dollar encountered challenges following the release of the University of Michigan Consumer Sentiment Index, which dropped to 67.4 in May from April's 77.2, marking a six-month low and falling short of market expectations of 76 reading. 

However, the extent of these losses may have been curbed by an uptick in inflation expectations for the year ahead, with a reading of 3.5%, the highest in six months compared to April's 3.2%. Additionally, the five-year inflation outlook rose to 3.1%, a six-month high, up from 3.0% previously. These inflation indicators might have supported the US Treasury yields to advance, potentially lending support to the Greenback.

Reuters: The dollar consolidated against major peers on Monday as market participants awaited U.S. inflation data to assess the prospects of interest rate cuts this year. After a softer-than-expected U.S. payrolls report for April and seemingly dovish Federal Reserve policy announcement earlier this month, expectations have increased for rate reductions this year. Markets have priced in a 61.2% chance of some degree of rate reductions to begin at the Fed's September meeting, with about 50 basis points of cuts in total expected, CME's FedWatch Tool showed.

But comments by Fed officials last week were varied as speakers debated whether interest rates were high enough. A jump in consumers' inflation expectations, revealed in a survey on Friday, could further complicate the conversation. With recent data indicating the economy is slowing, investors are looking to confirm how sticky inflation is. The market will have a chance this week, with inflation readings in the form of the producer price index on Tuesday followed by the consumer price index on Wednesday.

"For the wheels to truly fall off of the U.S. dollar, incoming data needs to point to disinflation, not just pockets of weakness here and there," said Matt Simpson, senior market analyst at City Index. "If inflation data ticks higher again this month it will surely undo the work of softer growth and slightly weaker employment figures." The dollar index, which measures the greenback against a basket of currencies, was flat at 105.31, following its first weekly gain last week after two successive weeks of decline.

This week's CPI will be crucial for the Federal Open Market Committee's decision to start easing rates in September, said Carol Kong, a currency strategist at the Commonwealth Bank of Australia. "If we get a strong CPI this week, it will just leave the FOMC four more monthly CPI reports before the September meeting. I don’t think four benign CPI readings will give the FOMC enough confidence to start cutting rates in September." Fed Chair Jerome Powell will make an appearance on Tuesday at a meeting of the Foreign Bankers' Association in Amsterdam.

As markets look ahead this week to U.S. CPI, the yen won't be far from traders' minds amid an ongoing risk of currency intervention by Japanese authorities. Against the yen, the dollar was holding solid at 155.80, after touching its highest since May 2 at 155.965. The dollar has marched up against the yen after a 3% decline at the start of the month, its steepest weekly percentage drop since early December 2022, after two suspected interventions. Those spikes of yen strength appear to have spooked some yen bears, at least for now.

Yen futures data from the CFTC showed non-commercial short positions have fallen sharply from the 179,919 contracts on April 23, which was the most since June 2007. The currency received some support on Monday after the Bank of Japan sent a hawkish signal by cutting its offer amount for a segment of Japanese government bonds in the Asian morning. The euro was little changed at $1.07695 as the euro zone prepares for an inflation reading of its own on Friday.

China's offshore yuan slid 0.1% to 7.2414 while the onshore yuan fell to its lowest since April 30 at 7.2385, as traders awaited an announcement from the United States of new China tariffs. At the same time, the Chinese central bank said over the weekend that new bank lending fell more than expected in April and broad credit growth hit a record low. Separate data on Saturday showed Chinese consumer prices rose in April while producer prices extended declines.

The central bank pledged to support economic recovery. In cryptocurrencies, bitcoin last rose 0.68% to $60,889.51.

Reuters: South Africa's rand was little changed on Friday, ahead of U.S. inflation data next week that could hint at the future interest rate path in the world's biggest economy. At 1506 GMT, the rand traded at 18.4625 against the dollar, near its previous close of 18.4550. The dollar index was last trading around 0.16% stronger against a basket of global currencies. On the Johannesburg Stock Exchange, both the blue-chip Top-40 and the broader all-share index closed around 1.2% higher, given a boost by the resources index.

"The markets have run extremely hard, maybe a little bit too hard because next week we're going to have U.S. inflation numbers again, so the market shouldn't get ahead of itself," said Casparus Treurnicht, portfolio manager at Gryphon Asset Management. Traders will be looking toward U.S. inflation readings next week for clues about the trajectory of U.S. interest rates, with the last month's data boosting expectations that rate cuts will only come in November. The rand, like most emerging market currencies, takes direction from U.S. economic data in addition to local events. South Africa's benchmark 2030 government bond was marginally stronger, with the yield down 1.5 basis points to 10.485%.

Reuters: Asian shares crept to 15-month highs on Monday in a week where inflation figures could make or break hopes for earlier U.S. rate cuts, while Chinese activity data will test optimism about a sustained recovery in the world's No. 2 economy. Beijing has already reported a welcome pickup in inflation to an annual 0.3% in April, helping to soothe worries about a slide into prolonged deflation. Forecasts favour further gains in April retail sales and industrial output due on Friday. Chinese authorities are also set to sell 1 trillion yuan ($138.24 billion) in longer-dated bonds to help fund stimulus spending at home.

The improved sentiment has helped lift Chinese blue chips to a seven-month high. The index was 0.1% softer on Monday with some sectors pressured by reports the White House was about to release details of new tariffs on Chinese goods. MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.2%, after rallying for three weeks straight. Japan's Nikkei was flat, still saddled with speculation further losses for the yen could lead the Bank of Japan to raise rates in the next few months.

The central bank sent a hawkish signal to markets on Monday by cutting the amount of Japanese government bonds it offered to buy in a regular operation, so pushing yields up. Globally, much now depends on whether the U.S. April inflation report will show a moderation after three months of upside surprises. Median forecasts are for core consumer prices to rise 0.3% in the month, compared to 0.4% in March, pulling the annual rate down to 3.6%. So crucial are the data that rounding to the second decimal place could make all the difference.

"Our unrounded core CPI forecast at 0.27% m/m suggests larger risks for a dovish surprise to a rounded 0.2% increase," noted analysts at TD Securities. A low number would likely boost bets the Federal Reserve could ease as soon as July, which is currently priced at only a 25% chance. Equally, a high inflation print could push a rate cut out past September and challenge pricing for 42 basis points of easing this year. Also due are figures on U.S. producer prices, retail sales and jobless claims, along with final reports on European inflation that should reinforce expectations for a June rate cut from the European Central Bank.

There are a host of Fed speakers this week to update markets on their thinking, including Fed Chair Jerome Powell who appears with the head of the Dutch central bank on Tuesday. EUROSTOXX 50 futures were steady, while FTSE futures dipped 0.2%. S&P 500 futures and Nasdaq futures were both little changed early on Monday, after rallying last week as company earnings came in strong. With 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1%.

Once Nvidia reports on May 22, Magnificent Seven quarterly earnings are on track to jump 49%, according to Tajinder Dhillon, senior research analyst at LSEG. Companies reporting this week include Walmart, Home Depot and Cisco. Global share indices have also bounced to record highs in recent weeks, even as markets have scaled back some of their more aggressive wagers for rate cuts this year. "A straightforward interpretation of financial market performance is that there is more underlying strength in the global economy than had been anticipated and higher interest rates are reflecting rather than impeding global growth," says Bruce Kasman, head of economic research at JPMorgan. "We lean in this direction as our 2024 growth and policy rate forecasts both move higher."

The relative outperformance of the U.S. economy continues to underpin the dollar, while only the threat of Japanese intervention is stopping it from re-testing the 160 yen barrier. The dollar was holding firm at 155.92 yen on Monday, while the euro was flat at $1.0770 having faced resistance around $1.0791 last week. Gold eased a touch to $2,358 an ounce, after rising 2.5% last week on demand from momentum funds and talk of persistent buying by China. Oil prices faded late last week as U.S. gasoline and distillate inventories rose ahead of the start of the summer driving season. Brent was down another 22 cents at $82.57 a barrel, while U.S. crude dipped 17 cents to $78.09 per barrel.

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