On June 1st, Bank of England Governor Andrew Bailey sent a notably dovish signal, indicating that the central bank could tolerate inflation running above its 2% target for a period against a backdrop of economic weakness. This statement significantly cooled market expectations for a June rate hike. Speaking at an economic conference in Reykjavik, Iceland on May 29th, Bailey explicitly stated that "tolerating inflation temporarily above target to support the real economy is the appropriate way to handle this trade-off, given the weakness in the real economy and the uncertainty about the scale and duration of the shocks." However, he also warned that such tolerance would diminish if signs of second-round effects emerged. This stance suggests Bailey is unlikely to support a rate hike at the Bank's Monetary Policy Committee meeting on June 18th. Market pricing has adjusted accordingly—interest rate swap markets now only price in one 25-basis-point hike by the end of 2026, whereas in late April, the market had anticipated three hikes this year.
Additionally, preliminary data released by the German Federal Statistical Office on the 29th showed Germany's inflation rate in May was 2.6%, down from 2.9% in April. The data indicated that energy prices in Germany rose 6.6% year-on-year in May, a smaller increase than the 7.2% in March and 10.1% in April. Analysts pointed out that the slowdown in energy price increases is related to the government's temporary fuel subsidy measures. Since May 1st, Germany's gasoline and diesel taxes have been reduced by about 17 euro cents per liter for a two-month period. However, German Transport Minister Patrick Schnieder recently stated that the government has limited fiscal space to continue the fuel subsidy measures, and rising associated costs will ultimately push up food and daily necessities prices. The German Council of Economic Experts recently released an economic forecast report noting that, influenced by rising energy prices, Germany's inflation rates for this year and next are projected at 3% and 2.8% respectively, significantly higher than last year's 2.2%.
Key data to watch today includes Germany's April month-on-month real retail sales, Germany's May final SPGI Manufacturing PMI, the Eurozone's May final SPGI Manufacturing PMI, the UK's May final SPGI Manufacturing PMI, the Eurozone's April unemployment rate, and the U.S. May ISM Manufacturing PMI.
**USD Index**
The US Dollar Index traded in a narrow range last Friday, closing slightly lower on the daily chart, with the current exchange rate hovering around 99.00. Positive signals from the extended US-Iran ceasefire negotiations, which dampened safe-haven demand for the dollar, were the main factor pressuring the exchange rate lower. However, better-than-expected US economic data released during the period and lingering expectations for Federal Reserve rate hikes limited the downside. Focus today is on resistance near 99.50, with support near 98.50.
**EUR/USD**
The Euro traded higher last Friday, closing with modest gains on the daily chart, with the current exchange rate around 1.1650. In addition to continued support from short covering, the US Dollar Index weakening due to reduced safe-haven demand as Middle East tensions showed signs of easing was also a key factor supporting the Euro's rebound. Furthermore, expectations for a European Central Bank rate hike provided some underlying support. Focus today is on resistance near 1.1750, with support near 1.1550.
**GBP/USD**
The British Pound traded higher last Friday, closing slightly up on the daily chart, with the current exchange rate around 1.3450. Apart from technical buying support formed near the 1.3400 level, the weakening US Dollar Index due to cooling safe-haven demand was also a significant factor supporting the Pound's rebound. However, dovish remarks from the Bank of England Governor, which tempered expectations for a BoE rate hike, limited the pair's upside. Focus today is on resistance near 1.3550, with support near 1.3350.
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