The Federal Reserve’s key inflation measure, Core PCE, surged to 3.1% in April, raising concerns in the foreign exchange and equity markets. The dollar index rose briefly to the level of 90.40 on Friday, but could not sustain the level. Obviously, there is a clash of opinions on the market about the nature of the increased inflation that is now observed in the United States. Some investors believe that the effect of last year's low base and temporary inflation growth drivers will soon cease to impact and inflation will normalize, returning to the 2% area. Others believe that the Fed is missing some points and the movement of inflation higher can provoke a preventive QE tapering, so they are trying to price in this still tail risk.

The tug of war will continue next week. In this regard, in the first half of the week, the markets will be focused on such reports as Chinese PMI in the manufacturing sector on Monday, the US PMI in the manufacturing sector on Tuesday. The inflation component in these reports will receive special attention from the markets.

Markets will be busy preparing for the May NFP report in the second half of the week. Job growth is expected by 700K after the dismal 200K in April. If we see strong numbers for job growth, inflation expectations will intensify, as will pressure on the Fed. Bonds may start falling again, while the dollar rallies, while US stock indices are likely to come under pressure due to increased risks of early withdrawal of Fed support measures.

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