OVERNIGHT MARKET SUMMARY
The U.S. dollar index tumbled to its lowest level in four months overnight, dragged broadly lower by the continued rally in the euro, which is up over a percent and a half against the greenback in just the past two days. The dollar’s broadly heavier tone this week was done no favors by cooler than expected wholesale inflation data on Thursday, which showed the first decline in PPI in almost a year and a half in December.
This morning however, U.S. economic data painted a much more positive picture. The closely watched CPI report showed a slightly cooler than expected 0.1%(m/m) increase in consumer inflation in December but hotter than expected figures ex-food and energy. Importantly, the yearly core CPI rate rose from 1.7% to 1.8% last month. Separately, retail sales rose by a solid 0.4%(m/m) both for the headline and ex-autos in December and saw sizable upward revisions to November’s already very strong sales figures. Initially at least, the solid data this morning did little to meaningfully lift the broadly heavier dollar.
The euro remains the market’s darling heading into the long holiday weekend in the U.S. The single currency shot up to a four-month peak yesterday and added to those impressive gains overnight, currently trading at its best level in in three years against the greenback. More hawkish than expected minutes from the ECB’s December Governing Council meeting sparked the euro’s rally, which blasted through key technical resistance against the dollar and was further supported by news that Angela Merkel’s Christian Democrats were making progress in forming a “grand coalition” with the Social Democrats.
The dollar rose further off of a six-week low against the Japanese yen after this morning’s positive U.S. data and the resulting move higher in Treasury yields. The dollar had slid against the yen this week following a routine modification to the BOJ’s market operations, which many investors interpreted as a signal that even the ultra-accommodative BOJ could be considering a move to begin normalizing monetary policy.
The Aussie, which broke above key technical resistance against the greenback to hit a four-month peak yesterday, pared some of its gains overnight and following this morning’s solid U.S. economic data.
USD: The U.S. dollar index slid to a four-month low overnight, largely depressed by its performance against the rallying euro this week. The broadly stronger euro, which is trading near its best level in three years and up over a percent and a half in the past two days alone, maybe overstating some of the dollar’s weakness. Indeed, this morning’s economic data argues for the Fed to continue to normalize lending rates at a steady clip, with this year’s first quarter-point hike likely to come at is FOMC meeting in March. The rise in core CPI in December, the biggest in 11 months, helped support expectations that inflation pressures are building and that ultimately, the risks to the Fed’s outlook for three lending rate increases this year, may be to the upside. Still, given the euro’s strong momentum this week, the dollar will likely struggle capitalize on today’s solid economic data.
EUR: The euro added to the previous session’s gains overnight, hitting its highest level against the greenback in three years. The minutes from the ECB’s December Governing Council meeting released yesterday showed that policymakers were likely to revisit their forward guidance on the bank’s money printing operations in early 2018, which bolstered expectations that ECB asset purchases would be wound down by September. Some investors are also bringing in their timelines for when the ECB first raises lending rates from 2019 to late 2018- a scenario that is not yet priced into the euro’s valuation. Strong momentum, the break above key technical resistance against the dollar and news that Germany’s CDU and SPD parties are moving closer to forming a “grand coalition” all helped keep the single currency broadly supported.
JPY: The yen backed further off of a six-week low against the dollar after this morning’s solid U.S. economic reports, which showed very strong retail sales and the largest increase in core CPI in 11 months. U.S Treasury bond yields rose in the wake of this morning’s U.S. data, adding to the greenback’s improved tone against the yen. Still, the Japanese currency remains higher for the week following a routine tweak to the BOJ’s market operations, which many investors interpreted as an indication that officials there may be eyeing an eventual exit from years of money printing operations.
AUD: The Aussie slipped from yesterday’s four-month peak as investors booked profits on its strong rise this week. The Aussie was boosted by a blowout retail sales report the previous session, which suggested that RBA lending rates could potentially rise sooner than 2019. A continued rally in global commodity prices, as highlighted by the rise in Reuters’ CRB commodity index to its highest level in a year, has added to the broadly improved tone for the AUD. The currency’s inability to hole above technical support and the rise in U.S. bond yields weighed on it this morning.
GBP: Sterling rallied to its highest level since the Brexit referendum in mid-June of 2016 after a media report claimed that both Spain and the Netherlands are open to the idea of a “soft Brexit”. The surprisingly consolatory position by two EU heavyweights ahead of the start of key U.K.-EU trade talks suggests a potentially easier road ahead for the Brexit negotiations- a broadly positive scenario for the pound.
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