"Next week could be wild. The stock market is still near record highs. It's consolidating its gain. It seems to have lost some of its upside momentum. What's interesting is it's really not following bonds which it was for a while," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.
"Bonds and stocks were really moving together. Now they're not. The key is do they come back in line. I think the general sense is that people are feeling more confident that the two-month dollar downside correction is over."
The dollar index gained in the past week, as foreign exchange traders, more than others, focused on the words of Fed Chair Janet Yellen. She spoke before the Memorial Day weekend and said the central bank could raise rates this year if the economic data are strong enough. That helped the dollar break out against the yen, which sank to a 12-year low, on expectations of higher U.S. interest rates.
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As for upcoming Fed speakers, New York Fed President William Dudley speaks on Friday, several hours after the employment report is released. Dudley is viewed as being close to Yellen, and his words will be important.
Chandler said for the Fed to hike, there needs to be improvements in consumption—data that will be reported with personal income Monday. He also said inflation needs to pick up and the Fed's preferred measure, the PCE deflator, is released Monday. There are 227,000 nonfarm payrolls expected when May's employment report is released Friday, and if that number is as expected or better, it could also encourage investors to consider a September rate increase.
"If it's a downside surprise, I think what people will jump to is that the Fed won't raise rates in September," Chandler said. "Given the market's rally, I think the market will have a symmetrical response. It will come off more on a weak number than rally on a strong number."
Traders will also be looking overseas for direction. China PMI data is released Sunday, European inflation data are released Tuesday and the European Central Bank rates meeting will be followed by a presser Wednesday with ECB President Mario Draghi.