As we move into the new trading week, markets are expected to start off quietly due to the Memorial Day holiday in the US and a bank holiday in the UK on Monday. These holidays will likely result in lower trading volumes, potentially leading to subdued price action. However, traders should remain vigilant as thin liquidity can sometimes amplify price movements if unexpected news breaks, with fewer market participants around to absorb buy and sell orders.

A Calm Week with Potential for Friday Volatility

While the beginning of the week might be calm with few high-impact events, Friday could see significant market movements with the release of key economic indicators. In the Eurozone, May's Consumer Price Index (CPI) data will be released, and in the US, core price consumption expenditure data— the Federal Reserve's most closely watched inflation measure—will be published.

Eurozone Outlook

The European Central Bank (ECB) is likely to lower borrowing costs from the current record high of 4% at its June meeting. The May Flash CPI report will be pivotal, providing insights into recent price trends within the regional economy and influencing the ECB's monetary policy decisions. Analysts anticipate Eurozone inflation to edge up to 2.5% year-over-year in May from 2.4% in April, with the core gauge remaining steady at 2.7%. A higher-than-expected inflation reading could cause the ECB to adopt a more cautious approach to future rate cuts. This scenario could lead to increased volatility for euro FX pairs as the week progresses.

US Outlook

In the US, the core PCE deflator data due on Friday is expected to show a 0.3% increase in April, with the annual rate dipping slightly to 2.7% from 2.8%. A lower-than-expected inflation figure could boost optimism that the disinflationary trend is resuming, potentially prompting the Federal Reserve to consider easing monetary policy later in the year. This would be bearish for the US dollar but positive for stocks and gold.

On the other hand, higher-than-expected inflation could push interest rate expectations in a more hawkish direction, possibly delaying the Fed's timeline for rate cuts. This would likely lead to higher bond yields and a stronger dollar, creating headwinds for equities and precious metals.