The ongoing debate on whether economic growth and inflationary pressure warrant monetary easing has kept financial markets volatile and it is not about to change soon.
The next trigger may come from US non-farm payroll data to be released late on June 4 and the European Central Bank's (ECB) meeting next week.
The US non-farm payrolls report is expected to note a significant rise in jobs in May. The significant improvement seen in weekly jobless claims in the last few weeks boosted the outlook for the labour market and non-farm payrolls report may support this view.
Market players, however, still remember the disappointment from April non-farm payroll report and a weak reading may give a new twist to the ongoing monetary tightening debate.
Most central banks have maintained a dovish stance, however, market players have been rattled by comments from some Fed officials who support talks over possible tapering of asset purchases.
ECB, which is due to meet next week, while emphasising on continuing with accommodative monetary policy, may also discuss rising inflation concerns and improving growth outlook.
Rising food and commodity prices have boosted inflation concerns and it has been reflected in the inflation data as well. Adding to inflation concerns, Brent crude surged above $71 a barrel this week and tested the highest level since May 2019.
Further cementing inflation concerns, the United Nations food agency said world food prices rose in May at their fastest monthly rate in more than a decade, posting a 12th consecutive monthly increase, to hit their highest level since September 2011.
A spate of upbeat economic data from the US highlighted strong growth. The Fed Beige book noted that the national economy expanded at a moderate pace from early April to late May, a somewhat faster rate than the prior reporting period.
This debate around monetary tightening has kept markets volatile and we are seeing reactions to every economic number and central bank comment. The US dollar index slumped to January lows last week as Federal Reserve emphasised on keeping monetary policy loose. The US currency, however, recovered to hit a three-week high this week as upbeat economic data made a case for Fed's tightening.
The directionless trade in the dollar has reflected in commodities as well. Gold, which surged to January high near $1,920 a troy ounce, has corrected sharply to trade near $1,870. Crude outperformed other commodities but has stalled near highs. Copper is set for its third decline in last four weeks.
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