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Sell in May and go away? Not so fast. This could be a wild ride from here onwards for EUR/USD. USD/JPY and lots more. Here is the view from BNP Paribas:

Monday’s US Memorial Day and the UK Spring Bank Holiday mark the start of the summer season for many market participants and we continue to anticipate choppy conditions ahead. Fed expectations have been steadily adjusting higher amid hawkish messages from Fed speakers.

While the risk environment has tolerated this adjustment well so far, we would caution that continued gains in the USD could begin to trigger some of the frictions which disrupted markets in Q1.  In particular, markets may become increasingly wary of higher USDCNY fixings, and energy prices could start to slide again if the USD gains momentum. The views of Fed Chair Yellen and data over the next three weeks will also influence Fed expectations.

However, this Friday’s Yellen appearance at Harvard does not seem a likely venue for sending a policy message, while our forecast for the US employment report next Friday is neither strong nor weak enough to be decisive.

Currency headwinds easing for FED ECB

Our economists forecast a 110k rise in payrolls.  This would mark a fourth consecutive slowing in job creation and be the softest result since August. At the same time, it would leave the three-month average at 159k, which might still meet Fed criteria for continued labour market improvement.

It seems likely that uncertainty on the summer Fed outlook will linger at least until Fed Chair Yellen’s June 6 speech the following Monday. We expect the ECB to hold policy steady this week. With activity having picked up in Q1, inflation expectations rising, and the EUR effective rate stable, there is little pressure on the ECB to act now.  We think the BOJ will be the next G10 central bank to ease and favour EURJPY longs heading into summer.

We remain most bearish on commodity currencies heading into summer, with volatile market conditions likely to be damaging for deficit economy currencies and commodity prices expected to retreat. We will watch Australian and Canadian Q1 GDP data for more evidence that domestic vulnerabilities are also rising.