Will FX markets see another summer slowdown?

So where do we stand right now? Well China and Europe appear to be in the doldrums. Next Saturday we'll get the official manufacturing PMI data from Beijing that may follow the HSBC version lower. Europe's PMI figures were dismal suggesting that the currency bloc is likely to return to recession. The UK is likely to skate along the bottom for some time, and we expect growth for the rest of this year in Japan to remain uneven.

The US is headed in the right direction and we expect the next couple of months' worth of economic data to continue to pick up. Employment is rising and wage data released next week may show this improvement in employment seeping into wage growth helping to sustain a revival in consumption that we have seen since strong retail sales in February. But can the US economy continue to grow without Fed help?

This we don't know. The Fed's stimuli in recent years have boosted its contribution to GDP by approximately 20% of GDP (it's about 30% for the ECB and 20% for the BOE). But the Federal Reserve's balance sheet has now started to shrink slightly, which is in contrast to the ECB, BOE and BOJ. The US economy hasn't known a year without stimulus since 2009. But now, some say, the economy is different.

But we have some reservations. The housing market is still extremely weak; we may have seen some pick-up in sales but prices remain low eroding household wealth. Added to this Treasury yields have been rising, which could make it more expensive to get a mortgage in the US in the coming months. Gas prices are also elevated and both of these factors are major headwinds that could constrain the economic revival. It seems unlikely to us that if these factors start to weigh on growth in the coming months the Fed will take a back seat.

Also, we get income growth this week from the US. Although it's meant to pick up for last month, incomes are still fairly lacklustre. This makes the US's export sector even more important to sustain growth as weak wages could constrain consumption going forward. Yet China and Europe are slowing down, which could reduce demand for US-made goods.

Thus, we believe that we are at an inflection point for growth in the US. We need to see economic signals overcome obstacles like high gas prices and a potential for another flare up of sovereign fears in Europe to really ease concerns that the US will stumble again this summer.

This is of major importance to financial markets. If the US's pick-up doesn't follow through then Treasury yields may get stuck in a rut around 2.4% and fail to move higher. This could weigh on the dollar and reverse some of the recent dollar strength versus the euro and the yen, especially if the Fed considers another round of QE.

But if this scenario plays out and the US slows then the impact on commodities and stocks could be more complex. These asset classes (especially stocks, energy and base metals) would most likely start to fall and pre-empt a decline in growth at the first sign of any softening of the data and then start to rebound strongly at the first hint of QE from the Fed, which is exactly the pattern of price action we have seen before in this uneven recovery.

For traders, though, this idea won't play out tomorrow or the next day, it's a slow burner. However, it does mean that volatility could be back and there is a return to some exciting moves in FX land.