The USD is stronger this morning against most currencies while US equity futures and Treasury yields both hover near unchanged levels. After last week’s policy rate cuts at both the Bank of Canada and the European Central Bank, the focus is now on the US Federal Reserve’s rate decision on Wednesday afternoon, which will be preceded by the CPI reading for the month of May earlier in the day.

The Fed currently finds itself in a rather complex position ahead of Wednesday’s rate decision as a multitude of factors cloud the rate path forward:

• Employment: 5 of the 6 headline Non-Farm Payroll readings so far this year have all been stronger than expectations, including last Friday’s
• Inflation: while CPI and PCE have both stabilized, the latest readings have been consistently higher than the recent low for the month of January and continue to be well above the Fed’s official 2% “long-term” target. Average hourly earnings remain strong as well with Friday’s YoY data at +4.1%
• Peers: both the Bank of Canada and the European Central Bank cut their respective policy rates by 25 basis points last week for the first time in years yet a cut by the Fed is not fully priced by Fed Funds futures markets until December of this year
• US Treasuries: the combination of increasing bond issuance as well as record amounts of interest payments are putting a lot of pressure on the Fed to cut to ease the burden on the U.S. Department of the Treasury

Both the Employment and Inflation metrics above (technically the only things the fed should be concerned with as they are the official dual-mandates) imply the Fed continues their higher-for-longer policy for the foreseeable future. The latter two, however, make that decision a lot more difficult as the pressure from the central bank sticking out amongst its peers (some of the US’s largest trading partners) AND making the US Treasury's job harder is a lot of political weight to shoulder.

In fact, the Treasury is due to auction $119 billion of bonds spread out across this week so the market will be keeping an eye on the yields given the spotty auction outcomes as of late. And as if the Fed’s 2-day meeting doesn’t have enough data to look at, US CPI for May is to be released at 8:30 Wednesday morning where the year-over-year reading is expected to remain unchanged at 3.4%.

With the USD is 0.35% away from YtD highs and 1.1% from last year’s highs, Wednesday’s decision may be a key driver to determine whether we run through near term resistance levels in the dollar and possibly even begin a new trend.

Additional thematic highlights as well as this week’s event calendar:

• European parliamentary elections over the weekend showed “far-right” politicians in numerous countries (France, Germany, and Italy included) gaining a significant amount of representation leading to declines in EUR/USD
• A proposed increase on the capital-gains tax in Canada will be called to vote later this week
• The Bank of Japan is to release its rate decision Friday. While an unchanged decision is expected, a decrease in bond buying is expected by many

Event Calendar:

• Tuesday: Canada Building Permits; United Kingdom Employment; Mexico Industrial Production; Brazil Inflation; ECB’s Holzmann & Lane speak
• Wednesday: US CPI & Fed Rate Decision; United Kingdom Industrial Production & GDP
• Thursday: US Weekly Jobless Claims & PPI; Eurozone Industrial Production; Brazil Retail Sales; G-7 Leaders’ Summit; Fed’s Williams & Treasury’s Yellen speak
• Friday: US University of Michigan Indices; ECB’s Lagarde & Lane speak; Fed’s Goolsbee speaks

EUR/USD is 0.6% lower on the day and 1% lower versus this time last week as risk-aversion due to this weekend’s parliamentary elections in Europe outweigh the EUR strength from the “hawkish cut” by the European Central Bank last Thursday. “Far-right” politicians increased their presence in Germany, Italy, and France amongst others leading to stability concerns for the Eurozone as a whole. The primary catalysts for the EUR this week are multiple ECB speakers including President Lagarde as well as Wednesday’s German CPI.

USD/CAD is slightly higher on the day and 1.15% higher versus this time last week. Friday’s slightly stronger than expected Canadian jobs reading was far outweighed by that of the US and concern over a vote on a proposed increase in capital gains taxes in Canada this week has helped drive the Loonie weaker. The Bank of Canada also cut interest rates for the first time in years last week and the next fully priced in cut is for September. At the moment, the total cuts YtD will be 3 for Canada and 1 for the US, as priced in by rate instruments.

GBP/USD is essentially unchanged on the day and versus this time last week, although the 7-day range has been about 1%. The economic highlight of the week is tomorrow’s employment data. The unemployment rate and average weekly earnings for April are expected to remain unchanged at 4.3% and 5.7%, respectively.

USD/MXN is effectively unchanged this morning but still higher by almost 8.5% versus this time last week as the Morena party’s strength in the recent elections continues to weigh on investor sentiment. While industrial production is set to be released tomorrow for the month of April, political headlines are still the primary drivers behind most Peso movement.

USD/BRL is .35% higher this morning and about 2.2% higher versus this time last week. While weakness in the Real vs the USD has largely been driven by external factors, concerns that the government won't be able to meet its fiscal targets are pushing the pair higher today. Tomorrow’s inflation and Thursday’s retail sales figures should shed more light on the health of the economy.