File picture: The Frankfurt skyline is seen from the meeting room of the European Central Bank (ECB) council meeting room on the 41st floor at the construction site of the new headquarters of the ECB during a guided media tour in Frankfurt. Image Credit: Reuters

The European Central Bank (ECB) could open the door to a weaker euro on Thursday as it initiates its first interest-rate cut of the cycle, setting a divergent policy path from the US. With a quarter-point reduction almost certain, officials will embrace a widening gap between borrowing costs on either side of the Atlantic, implications of which they've discussed for months.

ECB policymakers, led by President Christine Lagarde, have insisted they are comfortable pursuing a separate path from the Federal Reserve, even if that risks a weaker currency that could stoke inflation. How tolerant officials will be is likely to loom large in their debate on further possible easing, especially after recent reports hinted at persistent consumer-price pressures. Most recently, data on Friday showed an underlying inflation gauge that unexpectedly rose in May for the first time in a year.

The ECB can already see how diverging policy prospects have begun to impact global markets. The euro has fallen to its weakest level against the pound in almost two years on the view that the Bank of England will lag behind the ECB in lowering rates.

Bank of Italy Governor Fabio Panetta acknowledged on Friday that cutting borrowing costs poses a currency risk to prices but added that tight US policy could also hurt global demand and thereby curb euro-area inflation. His Austrian colleague, Robert Holzmann, recently sounded more ominous, acknowledging that "the Fed with the dollar is, figuratively speaking, the gorilla in the room" for officials.

Thursday's decision will include quarterly forecasts that will be scrutinized for hints of future policy intentions, as will Lagarde's press conference. Money markets are currently betting on two reductions in total this year, with a small chance of a third. Denmark's central bank is likely to match the ECB move with a quarter-point cut of its own just hours after the eurozone outcome.

US and Canada focus on jobs and monetary policy

Following fresh US inflation and spending data, the government's jobs report on Friday is expected to show steady employment growth in May. The median forecast in a Bloomberg survey calls for a 190,000 increase, a modest acceleration from the prior month. This would result in a cooling of average job growth over the most recent three months, adding to evidence that labor demand is softening. The unemployment rate, based on a separate survey of households, is projected to hold at 3.9%.

Average hourly earnings are expected to rise 3.9% from May 2023, matching the prior month's annual gain. While earnings growth is holding at a three-year low, worker pay gains remain stronger than before the pandemic. The Labor Department will also issue March job openings data on Tuesday, with economists projecting nearly 8.4 million vacancies, slightly lower than the prior month. Openings continue to ease as employers have greater success filling positions, balancing the job market.

Additionally, the Institute for Supply Management will release results of its May surveys of manufacturers and services providers on Monday and Wednesday, respectively. In Canada, the Bank of Canada may soon begin an easing cycle. The country has seen four consecutive disinflationary reports, and a report on Friday showed slower-than-expected economic growth.

Economists and traders broadly expect the central bank to deliver a 25-basis point cut to its key policy rate on Wednesday. However, there remains some uncertainty about how Governor Tiff Macklem and his policymakers will respond. Given that household consumption remains strong and job gains exceeded expectations last month, they may wait for more data and start an easing cycle at the July 24 meeting instead.

Asia focuses on manufacturing and growth

Asia will see a slew of purchasing manager indexes on Monday. China's Caixin manufacturing PMI is likely to show continued activity at small- and medium-sized enterprises, with the gauge forecast to inch higher in May, marking a seventh month above the 50 boom-or-bust threshold. The services reading is also expected to edge higher. Indonesia, South Korea, the Philippines, Taiwan, and Vietnam will also release PMIs on the same day.

Figures on Wednesday are expected to show Australia's economy grew slightly in the first quarter compared to the previous period, marking the 10th straight expansion. Exports and inventories data a day earlier will provide economists with reference material to fine-tune their gross domestic product estimates. In Japan, corporate profits and capital spending numbers will provide insights on how first-quarter GDP may be revised. Headline inflation may have slowed a bit in Indonesia in May.

Consumer-price growth statistics are also due from South Korea, Thailand, Taiwan, and the Philippines. Real wages in Japan likely fell for the 25th month, a possible topic when Bank of Japan policy board member Toyoaki Nakamura speaks on Thursday. Elsewhere, the Reserve Bank of India is expected to hold its benchmark repurchase rate steady at 6.5% for an eighth straight meeting when the policy committee meets on Friday, as hotter-than-usual weather delays expectations for rate cuts. The week ends with China's May exports.

Europe, Middle East, Africa

While the ECB will take center stage, several industrial numbers will also be released throughout the week. Italian and Spanish factory PMIs for May are released on Monday, while production numbers for April will be published in France, Spain, and Germany starting on Wednesday, offering clues about the health of the economy at the start of the second quarter. German factory orders and trade statistics are also due. On Friday, a gauge of wages, a key indicator studied by officials to gauge inflation risks, will be released by the ECB. Bank of England policymakers will stick to a self-imposed quiet period with the election campaign underway before the UK's July 4 general election.

Turning south, Turkish officials hope that May inflation data on Monday will mark the peak and that price growth will rapidly decelerate thanks to aggressive monetary tightening. Analysts surveyed by Bloomberg anticipate an outcome of almost 75% in May, up from 69.8% a month earlier.

Other regions: inflation and Central Bank decisions

Mexico will post full-month and bi-weekly inflation reports, both currently running slightly above central bank forecasts. While a quarter-point interest-rate cut at Banxico's next meeting on June 27 remains the consensus, it's not guaranteed. Chile's economy accelerated sharply in the first quarter, and analysts expect April GDP-proxy data out this week to show that the second quarter got off to a strong start. However, consumer prices are expected to drift higher in the near term, with the May print likely inching up from April's 4% reading to just above the tolerance range.

Brazil watchers will closely monitor the central bank's weekly Focus market readout, which over the last month has seen inflation expectations for 2024 to 2026 creep progressively higher above the 3% target. Central bank chief Roberto Campos Neto noted in May that inflation expectations have been rising steeply. On a more positive note, first-quarter output data for Brazil is all but certain to show Latin America's biggest economy rebounding after stalling out in the second half of 2023.